What is Annuity
An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You get a fixed amount of money for the rest of your life in return for a lump sum payment or a series of instalments.
COMP/DOC/Nov/2022/2811/1623
Features of annuity
Below are some of the key features of an annuity plan:
1. Safe investment option
Annuity plans are low risk plans that are not market-linked. The amount you receive is guaranteed1 and is fixed at the time of the purchase of the plan
1T&Cs apply
2. Financial security
Annuity plans provide you with an income for life. This helps you stay financially independent during your retirement
3. Flexibility
These plans offer you the flexibility to choose how you want to receive your income. You can choose to receive the income from the plan monthly, quarterly, half-yearly or yearly. Some annuity plans also offer you the flexibility to pay your premiums monthly, half-yearly, yearly or all at once as per your convenience
What are the different types of annuities?
There are two types of annuities:
Immediate annuity plans
There is no accumulation phase and the plan starts working right from the vesting phase. It is purchased with a lump sum and the annuity payment starts immediately either for a limited tenure or lifetime.
Deferred annuity
These are the pension plans in which the annuity starts after a certain date. It can be further divided into the following:
The annuities may also vary basis the type of payout you receive:
Fixed Annuity
Simply put, an annuity plan that gives you a guaranteed1 amount throughout the tenure of the policy is a fixed annuity plan. This guaranteed amount is pre-decided at the time of purchase of the policy. The amount paid to you is guaranteed. It does not get affected by market fluctuations.
1T&C Apply
Variable Annuity
In a variable annuity plan, your premiums are invested in instruments, such as mutual funds or equities. Payouts from such plans depend on the performance of the fund your money is invested in. If the fund performs well, you will get greater returns and vice versa.
- Accumulation phase- It is the phase when you start investing and accumulating cash and commences from the date when you first time pay premium.
- Vesting phase- It is the date from which you will start getting the policy benefits in the form of pension.
Benefits of Different Types of Annuities
Below are the benefits of the different types of annuity plans. This can help you decide the right option for your financial needs.
Benefits of Immediate annuities
- Guaranteed1 income stream: Immediate annuity plans provide you with guaranteed1 income for your retirement. This helps you stay financially independent during your retirement
- Immediate payouts: Immediate annuity plans offer guaranteed payouts immediately after purchasing the plan. If you need your income to start immediately, these types of annuity plans can be a suitable option for you
- Protection against market volatility: Immediate annuity plans are not affected by market fluctuations. They offer a fixed payout
- Tax* benefits: Immediate annuity plans offer you tax* benefits on the premiums paid under the policy under Section 80C of The Income Tax Act, 1961
1T&Cs apply
Benefits of Deferred annuities
- Tax-deferred growth: Deferred annuities allow for tax-deferred growth on earnings. Your returns are not taxed until you make withdrawals. This helps you push the tax burden to a later stage in your life
- Tax* benefits: Deferred annuity plans offer you tax* benefits on premiums paid under the policy under Section 80C of The Income Tax Act, 1961
- Guaranteed1 income stream: Similar to immediate annuity plans, deferred annuities also provide guaranteed1 income for your retirement. They offer you a stable source of income for your post-retirement goals and help you stay financially independent during retirement
1T&Cs apply
How do different types of annuities work?
Annuities provide you with a regular income during your retirement throughout your lifetime. They offer various options to choose from, to suit your retirement needs. Here is how they work:
Life annuity
You will get regular (monthly/quarterly/yearly) annuity payouts from the scheme till you are alive. The annuity stops after your death.
Life annuity with return of purchase price
You will continue receiving annuity payments regularly until you die. After that, the insurer returns the initial amount, which was used to purchase the annuity, to your nominee. It is a good option for those who want to leave a legacy behind.
Annuity payable for a guaranteed period
The annuity is to be paid for a guaranteed period, say 5, 10 or 15 years even if the annuity buyer dies. Annuity stops either on the death of the annuitant or completion of the guaranteed period, whichever is later.
Inflation-indexed annuity
Every year, there will be a rise in the annuity payable at a certain rate, say 2% or 5%. Though it may not be linked to the actual inflation rate, the rationale is that it would take care of the increase in expenses to some extent.
Joint life survivor annuity
It keeps paying till either you or your spouse is alive.
Joint life annuity with return of purchase price
It keeps paying till you or your spouse is alive. In the case of the death of both, the nominee is entitled to get the initial invested amount.
Who should buy an Annuity plan?
If you want a guaranteed1 income for life, especially post-retirement, you should consider buying an annuity plan. The objective of an annuity plan is to ensure financial freedom during your retirement, when your regular income stops. You can use the payout from an annuity plan to cover your day-to-day expenses during retirement and to fulfil your post-retirement dreams, such as travelling, starting a venture, pursuing a hobby, and more.
1T&C Apply
What is the best time to buy an annuity plan?
Annuity plans provide you with the flexibility to start investing as per your convenience. If you are nearing retirement, you may have a large savings amount that you may want to invest. Some annuity plans provide you with the option to invest a lump sum and start receiving the income as early as the year following the purchase of the plan. You may also choose to receive the income at a later age.
If you are in your early earning years, you may want to invest smaller amounts towards your annuity plan regularly. Some annuity plans provide you with the option to invest regularly and receive income at a later age for your retirement. This enables you to invest small amounts, thereby making it easy on your pocket. It is important that you start investing in an annuity plan as early as possible.
Benefits of Annuity plans
a) Lifetime source of income
One of the key features of an annuity plan is that it provides a regular income throughout your life, even after retirement.
b) Multiple options to choose from
This offers you the flexibility to opt for a plan that suits your requirements. You may choose the single life option to get income for life, or the joint life option to cover your spouse as well. You may also opt to get the purchase price back after a certain period. Annuity plans provide multiple such options that help you customise the plan as per your needs.
c) Tax beneifts*
The premium you pay at the time of purchase of the plan is allowed as deduction up to ₹ 1.5 lakh under Section 80C of the Income Tax Act, 1961.
What is Surrender Period?
The surrender period starts right after purchasing an annuity plan. During this period, you cannot withdraw your funds from the plan. If you try to withdraw your money before the surrender period ends, you will likely pay a penalty.
Typically, surrender period for annuity plans can be between 6 to 8 years. This can, of course, be different depending on the nature of policy chosen and the insurer. Once the surrender period ends, the policyholder can surrender the policy in full or in part and get back the asset value of the policy without attracting any surrender charge.
COMP/DOC/Dec/2023/2212/5052
✅ When can you withdraw money from an annuity?
✅ How much income does an annuity payout on average?
✅ What are the most popular types of annuities?
There are different types of annuities in India that you can choose from. Some of these include the following:
1. Immediate annuity
2. Deferred annuity
3. Fixed annuity
4. Variable annuity
5. Lump sum annuity
✅ Is there an age limit for annuities?
✅ What is the best age to buy an annuity?
✅ Are annuities good for senior citizens?
✅ What's the difference between immediate and deferred annuities?
An immediate annuity offers you an income right after purchasing the annuity plan. You make a lump sum payment to the insurance company, and the insurer gives you regular income payments, either for a specific period or for the rest of your life, shortly after purchasing the plan.
On the other hand, a deferred annuity allows you to purchase an annuity plan and start receiving the payments at a later date in the future. Deferred annuity plans accumulate funds over a period. This is known as the accumulation phase of the plan. At the chosen date, you start receiving income payments from your accumulated capital.
COMP/DOC/Jun/2023/156/3278
✅ What happens to my annuity if I die?
✅ What are the tax* implications of buying an annuity pension plan?
✅ When can you withdraw money from an annuity?
✅ How much income does an annuity payout on average?
✅ What are the most popular types of annuities?
There are different types of annuities in India that you can choose from. Some of these include the following:
1. Immediate annuity
2. Deferred annuity
3. Fixed annuity
4. Variable annuity
5. Lump sum annuity
✅ Is there an age limit for annuities?
✅ What is the best age to buy an annuity?
✅ Are annuities good for senior citizens?
✅ What's the difference between immediate and deferred annuities?
An immediate annuity offers you an income right after purchasing the annuity plan. You make a lump sum payment to the insurance company, and the insurer gives you regular income payments, either for a specific period or for the rest of your life, shortly after purchasing the plan.
On the other hand, a deferred annuity allows you to purchase an annuity plan and start receiving the payments at a later date in the future. Deferred annuity plans accumulate funds over a period. This is known as the accumulation phase of the plan. At the chosen date, you start receiving income payments from your accumulated capital.
COMP/DOC/Jun/2023/156/3278
✅ What happens to my annuity if I die?
✅ What are the tax* implications of buying an annuity pension plan?
People like you also read ...
