“When overall interest rate falls general cost of living also comes down and when the interest rate goes up the cost of living also goes up. IRDAI is planning to introduce a floating rate annuity option which could be linked to benchmark such as G-Sec or an inflation index,” said Khuntia. This type of product will come in handy as the cost of living has been rising due to increasing inflation.
The benefit of such a product
Interest rates change with time and often goes through multiple cycles of ups and downs. Taking the fixed deposit (FD) rate offered by the State Bank of India (SBI) as an indicator for interest rate movement, the variation has been huge during the last decade when the highest FD rate ranged between 5.4% and 9.25%.
In an annuity investment, funds are locked in for longer period and often for life. In order to give guaranteed fixed income which can be sustained over a long period like 20 to 30 years, life insurance companies go for the most conservative rate, which is mostly on the lower side. The best interest rate offered on a majority of annuity products has been less than 6%. This leaves investors uninterested in buying the product and is the biggest reason for the lack of interest in annuity products in India.
There are many occasions when the interest rate in the economy increases to such a level that the difference between the general interest rate of fixed income products and the annuity rate ends up being vast. However, a fixed and lower rate of annuity often prevents investors from getting compensated for high inflation when general interest in the economy is higher.
This is where an inflation-index linked pension product will help. The flexible pension commitment based on market rate will allow insurers to offer a higher rate to investors. A floating rate annuity product which is linked to benchmark like G-sec or CPI will leave higher amount of regular income in the hand of annuitants whenever inflation goes up. This will also bridge the big gap in annuity products which has no option for investors looking for variable annuities with better rates.