Posted in Finance, Accounting and Economics Terms, Total Reads: 100
Definition: Inflation Protected Annuity
Inflation Protected Annuity (IPA) are less known annuity plans that take in account the inflation factor and hence annuities are adjusted accordingly. These plans are quite common in European countries but are less common in rest of the world. Basically with the advancement of technology life expectancy is increasing year by year, so it is getting difficult for a person to determine the amount of money required after retirement to continue with his/her lifestyle.
The common equation that comes out is, suppose if one requires A amount of money after retirement, to live for B number of years with a rate of return of C and inflation rate of D, it is imperative to take in account the inflation rate of the economy to adjust the money that would be required.
For example if my monthly expense today is Rs.10000 and the inflation rate in the economy is 5 per cent. After 20 years this Rs.10000 will be worth only Rs.3800 after 20 years. Hence if I am planning to use Rs.10000 for my lifestyle 20 years down the line then I would have to take in account the inflation so as to make sure that I don’t fall short of Rs.6200 (10000-3800). This is where IPA’s come into picture, these annuity schemes take into account the inflation rate and the annuity gets increased as per the inflation rate over the years.
Although IPA’s are not competitively priced as compared to immediate annuities and the initial annuity payouts are 20-30 per cent less than the immediate annuities but one thing that comes into their advantage is that IPAs account the inflation rate and the annuities over the year get compounded taking inflation into consideration.
A major reason for lower demand of IPAs is the awareness factor and a lot of people don’t consider the fact that life expectancy will increase as the time goes by and there is a major risk of outliving one’s expected lifetime.