Immediate Annuity Vs Deferred Annuity
Once you retire, managing your money can get tricky. Without a steady monthly pay cheque, you may find yourself at a loss. While you would have your savings, they would ideally be sitting in an account as one big lump sum. Figuring out how much to withdraw, and when, can be hard. Retirement income planning is important, and annuities can help you with it.
Annuities can offer financial freedom and independence in retirement. They provide a stable source of income that is structured to last for life. However, there are several different types of annuity plans, with immediate and deferred annuities being the most popular ones.
Choosing the right one for your situation is important. Let's find out more about the difference between immediate and deferred annuities.
What is an annuity?
An annuity is like a contract between you and your insurance company. In an annuity plan, you invest a lump sum amount or pay regular premiums during your earning years and receive guaranteed# regular payouts once you retire. Annuities can be of two types – immediate and deferred.
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What is an immediate annuity?
In an immediate annuity plan, you start receiving the regular income immediately after investing. You invest a lump sum amount and begin to receive the payout after 12 months from the start of your policy, depending on the frequency chosen. This option may be more suitable if you are nearing retirement and need an instant source of money.
What is a deferred annuity?
A deferred annuity plan offers a fixed income for a chosen period of time. You pay premiums for a set number of years, and once that period ends, you choose a future date from which your income will begin. From this date onward, the plan offers a regular income either for a set number of years or for life, depending on the plan you choose.
The exact plan options depend on your individual needs. Depending on what you pick, you may need to wait a certain period before your income begins, after which it continues for life.
A deferred annuity plan can be suitable if you still have some years to go before retirement and do not need immediate income right now.
What is the difference between immediate annuity and deferred annuity?
Here are some differences between deferred and immediate annuities:
| Immediate annuity | Deferred Annuity | |
|---|---|---|
| Premium payment | In a lump sum | In a series of instalments |
| Payouts | Immediately after paying the premium | From a fixed date in the future |
| Suitability | Ideal for people who are retiring immediately | Ideal for people who have a few years till retirement and do not need an income right away |
| Growth potential | Relatively low as you start receiving the income immediately | Relatively high as your money has time to grow |
Example to understand how immediate and deferred annuity works
Ravi is 60 and wants to invest a lump sum of ₹10,00,000 in an immediate annuity plan offering an annuity rate of 10% per annum.
His annual annuity income would be:
Annual Annuity = Investment × Annuity Rate
= ₹10,00,000 × 10%
= ₹1,00,000 per year
Since this is an immediate annuity, the accumulation period is not applicable, and the annuity payments begin as per the payout frequency and terms selected under the plan.
Now consider Lokesh, he invests ₹1,00,000 every year for 10 years before starting the annuity. In this case deferment period is 10 years.
Assuming the investments earn 10% per annum during the accumulation period, the future value can be calculated using the Future Value of an Ordinary Annuity formula:
Future Value = Annual Investment × [((1 + r)ⁿ − 1) / r] x (1+r)
Where:
- Annual Investment = ₹1,00,000
- r = 10% or 0.10
- n = 10 years
Therefore:
Future Value = ₹1,00,000 × [((1.10)¹⁰ − 1) / 0.10] x (1+10%)
= ₹17,53,117
Although the total amount invested over 10 years is ₹10,00,000, the accumulated corpus becomes approximately ₹17.5 lakh because the investments earn returns over the accumulation period.
If an annuity rate of 10% is then applied to this accumulated corpus:
Annual Annuity = ₹17,53,117 × 10%
= approximately ₹1,75,311
| Particulars | Immediate annuity | Deferred Annuity |
|---|---|---|
| Investment | ₹10 lakh lump sum | ₹1 lakh every year for 10 years |
| Total amount invested | ₹10 lakh | ₹10 lakh |
| Accumulation period | Not applicable | 10 years |
| Assumed return during accumulation | Not applicable | 10% p.a. |
| Corpus when annuity starts | ₹10 lakh | ₹17.53 lakh |
| Assumed annuity rate | 10% | 10% |
| Illustrative annual annuity | ₹1 lakh | ₹1.75 lakh |
| When annuity begins | Immediately, as per plan terms | After the deferment period |
Note: This is a simplified illustration intended to explain how immediate and deferred annuities work. The assumed 10% accumulation return and 10% annuity rate are illustrative and should not be interpreted as guaranteed or expected returns. Actual annuity payouts depend on factors such as prevailing annuity rates, age at purchase, annuity option selected, payout frequency, applicable charges, and the terms and conditions of the annuity plan.
Conclusion
Both immediate and deferred annuity plans have their advantages. You can choose an annuity plan that best suits your needs. You may take into account your future goals and the amount of time you have in which you want to achieve them.
If you want to invest in an annuity plan, you can check the ICICI Guaranteed Pension Plan that offers both immediate and deferred annuity options. You can receive your annuity immediately or defer it by 1 to 10 years. The plan offers a critical illness` or permanent disability` benefit option. Under this option, the purchase price is paid out on diagnosis of any critical illness` covered under the plan or on permanent disability` due to an accident. In addition to this, the plan also offers loyalty boosters^ for staying invested. Moreover, the plan offers you flexibility in the form of a loan facility for emergencies and a top-up option to boost your savings anytime you want. The minimum annuity per annum is ₹ 12,000/- while having no cap on the maximum limit.
Frequently asked questions - Immediate annuity vs deferred annuity
What is the primary difference between an immediate annuity and a deferred annuity?
The primary difference between a deferred annuity and an immediate annuity lies in timing. With a deferred annuity, you pay premiums over a number of years and start receiving payouts at a later date. With an immediate annuity, payments begin right away, shortly after the premium is paid.
What factors should individuals consider when deciding between immediate and deferred annuities?
When deciding between deferred and immediate annuities, you must consider the following factors:
Your timeline, and when you will actually need the income
Your savings, and how comfortably you can afford the premium
How much growth you expect from your savings over time
How does the payout structure vary between immediate and deferred annuities?
An immediate annuity offers payouts right away, based on your needs at the time. A deferred annuity, on the other hand, offers payouts starting from a future date of your choice.
What are the advantages of opting for a deferred annuity for retirement planning?
A deferred annuity gives you room to plan for retirement well in advance, rather than putting the pressure on you right before you retire. Since your savings have more time to grow, they have the potential to build up before payouts begin. It also lets you spread out your premiums over time, which tends to be easier to manage than paying a single lump sum.
What are the three types of annuities?
The three main types include:
Immediate
Deferred annuity
Variable annuity
COMP/DOC/Aug/2026/208/0897
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