Joint annuity

An annuity converts a retirement corpus into an income for life. The obvious question is: whose life?

A single life annuity answers with one name. It pays the annuitant and stops when the annuitant dies. If the spouse outlives them, the income has gone.

A joint annuity answers with two. The workbook states it in one line: here, the spouse too gets the annuity for lifetime after the death of the investor.

So the payments continue until the second death, not the first. That is the whole idea.

It is not free. Two lives means a longer expected payment period, so the annuity rate offered is lower than on a single life option. The corpus has not changed; it now has to stretch across two lifetimes.

Which matters because the risk it removes is real. A widow in her eighties with no pension is the case the option exists for.

The four options the workbook lists, and where the joint annuity sits among them:

The workbook ranks only the first two explicitly, calling the retained-purchase-price option the highest and the return-of-purchase-price option the lowest. It gives no annuity rate and no percentage reduction for the joint option, so any figure quoted for it would be invented. What it does establish is the direction: cover more lives or return more money, and the periodic annuity falls.

Other options exist. The workbook notes that companies also launch inflation adjusted and fixed increasing annuities.

Tax, which is where candidates lose marks. Unlike life insurance policies, annuities do not enjoy exempt status. The money received by the annuitant is treated as income and taxed in the annuitant's hands. The premium paid for the annuity contract is eligible for deduction under Section 80C, within the overall limit prescribed by the Act.

Apply that to a joint annuity and the consequence is specific: after the investor's death, the continuing annuity is taxable in the spouse's hands, at the spouse's own slab. A survivor with no other income may therefore pay far less tax on the same rupee of pension than the original annuitant did.

Why the rate is lower, mechanically. Life expectancy drives annuity pricing. The workbook records that an older annuitant gets a higher payout because the payment period is likely to be shorter, and that women get a lower payout than men because their life expectancy is higher. A joint annuity is priced on the survival of the longer-lived of two people, which is exactly the case that pushes the payout down.

The annuity rates below are illustrative; the workbook gives no rate for these options.

Mr and Mrs Krishnan are 62 and 59. He is annuitising Rs 60,00,000 from his retirement corpus and is shown three quotes.

The joint option costs him Rs 36,000 a year against the highest-paying option — about 8% less income.

What that Rs 36,000 buys. Suppose he dies at 72 and Mrs Krishnan lives to 88. On the single life option her pension income from this corpus is nil for sixteen years. On the joint option she receives Rs 3,96,000 a year for those sixteen years, Rs 63,36,000 in total. He gave up Rs 36,000 a year for ten years, Rs 3,60,000 in all, to secure it.

And the tax, which changes hands with the income. While he is alive the Rs 3,96,000 is added to his income and taxed at his slab. After his death it is Mrs Krishnan's income and taxed at hers. If her only other income is Rs 40,000 of bank interest, the same Rs 3,96,000 may fall in a much lower slab than it did in his hands.

Compare the guaranteed period option. An annuity guaranteed for 20 years would also have paid after his death at 72 — but only until the twentieth year, when Mrs Krishnan is 77. It would stop while she is still alive. Only the joint option is tied to her lifetime rather than to a calendar.

Chapter 5 (Retirement Products), section 5.3.1 (Annuity from insurance companies), lists the annuity payout options with the joint annuity as option (d), and follows immediately with the taxability of annuities — taxable in the annuitant's hands, with premium eligible under Section 80C.

Expect a match-the-option question, which is why the four descriptions have to be learned apart from each other. The two reliable recall points are that the retained-purchase-price option pays the highest annuity and the return-of-purchase-price option the lowest. A frequent second question asks whether annuity receipts are tax free; they are not.

• A joint annuity continues for the spouse's lifetime, not for a fixed number of years. The option that pays for a defined period regardless of survival is the guaranteed for a certain period option, and the two are deliberately confused in questions.
• Highest payout is the lifetime option with the purchase price retained; lowest is return of purchase price. The workbook ranks only these two.
• Annuity income is fully taxable. Unlike a life insurance payout, it is treated as income of the annuitant. Only the premium gets relief, under Section 80C within the overall limit.
• After the first death the annuity is the survivor's income, taxed at the survivor's slab, not the deceased's.
• The workbook gives no annuity rate for any of the four options. It ranks them relatively. A question demanding a percentage is not set from this passage.
• A joint annuity is not the same as a nomination. A nominee receives a lump sum where the option provides for one; a joint annuitant receives the periodic income itself.
• Women receive a lower annuity than men on the same corpus, because life expectancy is higher — the same mechanism that makes a joint annuity cheaper to the insurer to price and lower paying to the buyer.