A Handbook for E-Annuity Deposit

Digital trends are moulding consumer expectations and demands, and also the way businesses operate. On the one hand, digital disruption in finance has become an unavoidable reality. On the other, what has not changed is the expectation of a steady stream of income by an individual to spend a peaceful retired life. Usually, retirees opt for an annuity plan of an insurance company; in policyholders provide the insurance company a lump-sum payment in exchange for a series of payments to be made in the future.

E-Annuity Deposit Scheme by SBI

One such product, which marries the above two mentioned concepts of life is the annuity deposit scheme of a bank. Similar to an annuity plan offered by insurance companies, such a scheme enables depositors to make a one-time lump sum payment to the bank in return for fixed monthly payouts that comprise a portion of the principal amount and the interest on the diminishing principal amount. As a case in point, let us study the concept with the help of the Annuity deposit scheme introduced by the State Bank of India, the country’s largest bank.

Salient Features of E-Annuity Deposit Scheme by SBI

The following are the key features of SBI E-Annuity Deposit Scheme:

• Under this e-Annuity deposit scheme, a lump sum amount can be deposited by an individual investor, through the online mode, from savings, current, or overdraft account.

• This e-Annuity deposit is repaid to the individual investor over the deposit tenure by way of equated monthly installments (EMI). An EMI comprises a principal component and an interest component on the reducing principal balance.

• There is no maximum amount limit for deposit. The minimum deposit amount for the e-Annuity deposit is based on a minimum monthly annuity of Rs.1,000/- for the chosen tenure. In no event, the minimum amount of deposit should be below Rs.25,000/-. For example, for a 4-year deposit, the amount of investment shall be Rs.48,000/-.

• The payment of an installment is on the month's anniversary date that follows the month of deposit. For a non-existent date (29th, 30th & 31st), the payment will be made on the1st day of the following month. This means that if the date of deposit is 30th January, then the installment shall start from 1st March of the year.

• The e-Annuity deposit is available for 3-year, 5-year, 7-year, and 10-year tenures. This provides a variety of options to the investors.

• The interest rate applicable to the e-Annuity deposit scheme is the same as those offered by the State Bank of India for its fixed deposits for the chosen tenure. For example, if an individual invests in the deposit for the tenure of 5 years, then the interest shall be according to the interest rate that applies to the 5-years fixed deposit. Similar to fixed deposits, senior citizens will get 50 basis points (0.50%) higher interest rate in comparison to the applicable rate.

• The interest component shall be subject to tax deduction at source (TDS).

• Indian residents, including minors, can invest in the e-Annuity Deposit scheme. However, the scheme seems to be most suited for retired individuals. The scheme can have a single or a joint holder.

• Premature withdrawal of the e-Annuity deposit is allowed for deposits up to Rs.15 lakh through the designated branch, albeit with a penalty. A premature withdrawal is permitted through the designated branch only, without penalty, in case of death of the deposit holder.

• Since the equated monthly installments comprise a principal component and interest component, there is no separate maturity amount on the maturity date.

• The e-Annuity deposit scheme comes with a nomination facility, which is chosen while investing in the deposit. Any modification shall have to be carried out at a branch of the State Bank of India.

• The deposit holder is eligible to get a loan or an overdraft facility from the State Bank of India. Its value can be to a maximum of 75% of the balance amount of the deposit. Once the loan amount has been disbursed, all further annuity payments are deposited in the loan account. The interest rate on loan or overdraft is expected to be higher than the deposit rate by 1%-2%, as per the applicable rate.

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Benefits of E-Annuity Deposit Scheme

The most attractive feature of an e-annuity deposit scheme is its ability to provide an assured payout for a fixed period. These payments are meant to replace the income one earned during working years, and they offer a sense of financial security. The individual deposit holder is able to plan one's post-retirement life based on the certainty of the installment payments. Further, the financial security provided by the State Bank of India is perceived to be at par with that of the Government of India.

The e-Annuity Deposit plan may suit those looking for a higher monthly receipt on their deposits while assuming a risk that is similar to that of a fixed deposit with the State Bank of India.

A retiree faces the risk of outliving one’s retirement corpus or finds oneself to reinvest after a drop in interest rates. As the annuity deposit scheme does not have a maturity amount, the individual does not run the risk of reinvestment. Such schemes are ideal in higher interest rate scenarios during which medium to long tenure investments can be made.

Since the payouts are equated in nature, one may plan the investment in the deposit in such a way that it aligns with one's post-retirement monthly expenses.

Considering the risk of inflation in the present low-interest rate scenario, it'll be beneficial for the individual to opt for a lower tenure e-Annuity Deposit, which, although it may provide a lower rate of return, may allow the individual an opportunity to reinvest at a higher interest rate upon completion of the tenure of the deposit. Moreover, a lower tenure also ensures a higher monthly payout in an equated monthly installment scheme.

Limitations of the Scheme

Here is the rundown of the limitations of the scheme:

• The scheme is in the nature of an immediate annuity, as opposed to a deferred annuity, wherein an individual can build a corpus for retirement whilst in the prime of one’s age. This makes the scheme more suitable for a person who has retired or who is very close to retirement and not for someone looking to plan one’s retirement much before superannuation.

• In addition to providing income post-retirement, some annuity plans offered by insurance companies also provide an additional insurance cover. In the unfortunate event of the policyholder's death, this is meant to provide financial security to the dependents of the policyholder. This feature is missing in the e-Annuity deposit scheme.

• Apart from a higher monthly payout due to the EMI structure, this scheme does not offer a significant advantage over a fixed deposit with the State Bank of India.

• Being an investment with the State Bank of India, while the investment may be considered safe, the interest rates on offer may not beat inflation by a significant margin.

• Investing in an annuity plan with an insurance company generally provides tax benefits as an added attraction. The tax benefits range from deduction under Section 80C of the Income Tax Act to tax exemption in the event of insurance cover proceeds paid to the dependents of the policyholder upon death. Unlike an annuity plan offered by insurance companies, the e-Annuity deposit scheme of the State Bank of India does not provide tax benefits for investing in the scheme.

Difference with Recurring and Fixed Deposits

The e-Annuity deposit is different from a Recurring Deposit account. In a Recurring Deposit account, an individual deposits money in the bank in installments and receives a pre-agreed amount on the date of maturity.

The e-Annuity deposit also differs from a Fixed Deposit account. In a Fixed Deposit account, although the individual makes a one-time deposit, the maturity amount is received on the maturity date. The maturity amount may comprise of the principal and interest components in case of cumulative deposits or comprise of the principal component only in case of non-cumulative deposits as the bank separately pays the interest component at periodic intervals.

As opposed to Recurring or Fixed Deposit schemes, an annuity deposit scheme accepts a one-time deposit of money, and that amount is repaid to the deposit holder over a period of months through equated monthly installments over the tenure selected by the deposit holder.

Final Words!

The annuity deposit scheme offers most of the features that are expected from a retirement investment, viz. safety of principal, a reasonable rate of return, stable monthly income, liquidity, etc. Considering the pros and cons as discussed above, any retired individual may use the features of this scheme to one’s benefit.