What are annuities?

Annuities are types of plans where you make a lump sum payment and get a regular income for a certain period of time or for life. This enables you to fulfil your post-retirement dreams and maintain your current lifestyle even after retirement.

What are the different types of annuities?

There are primarily two types of annuities. They are:

Immediate annuity

This is a type of annuity plan that provides you with a guaranteed¹ regular income immediately after you pay the lump sum premium. If you are nearing retirement and above 58 years of age, this plan can be beneficial.

¹ T&Cs Apply

Deferred annuity

In a deferred annuity plan, your income starts at a later date and you can choose when you want the income to start. If you still have a few years before you retire and are between 45 and 58 years old, this type of annuity may be beneficial for you.

Annuities can be of the below two types based on the type of income you receive:

Fixed Annuity

This type of annuity does not get affected by market fluctuations, hence your income is a fixed and guaranteed¹ amount. This amount is pre-decided by you at the time of purchase of the policy.

¹ T&Cs Apply

Variable Annuity

In a variable annuity plan, your premiums are invested in instruments, such as mutual funds or equities. Payments 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.

How do different types of annuities work?

You can also customise the annuity plan as per your needs. Below are the various options available in an annuity plan:

• Life annuity:

  In this option, you receive annuity for life. The frequency of payments is usually pre-decided by you at the time of the purchase of the policy. This provides a stable source of income during retirement.

• Joint life annuity:

  This is similar to a life annuity. In this option, you receive annuity payments for life. In your absence, your spouse continues to receive annuity payments for life.

• Life annuity with return of purchase price:

  This provides you annuity payments for life. In case of an unfortunate event, your loved ones will receive the amount you paid at the time of the purchase of the policy.

• Annuity payable for a pre-decided term:

  This provides you the option to choose the duration for which you would want to receive annuity payments. The period can be 5 years, 10 years, or more. This is decided at the time of purchase of the policy. In case of an unfortunate event during the tenure of the policy, the annuity payments are made to your loved ones.
  
  It is important to evaluate the various options provided by an annuity plan and choose the plan that best suits your retirement needs.

Key Considerations for Selecting an Annuity

Below are some factors that you can consider when browsing through different types of annuity plans:

Financial goals

Your financial goals determine the type of annuity suitable for you. For instance, an immediate annuity may be appropriate if you aim to retire immediately.

Payout options

Annuity plans offer various payout structures. Immediate annuities provide immediate payouts, while deferred annuities offer payouts after some years of buying the plan. Understanding these payout options can help you select the right plan.

Features

Annuity plans come with different features depending on the type of annuity. For example, some annuity plans may offer joint life options or surrender benefits. It is essential to review all the features of the plan before purchasing.

Pros and cons of types of annuities

Below are some pros and cons of purchasing annuity plans:

Pros:

• With annuity plans, you get a fixed regular income to help you be financially independent after retirement
• Income from annuity plans is not market-linked. So, these plans are low-risk
• Annuity plans also have tax^* benefits
• You can choose an annuity plan to cater to your needs – pick from immediate annuity or deferred annuity
• Annuity plans can also help secure your spouse

Cons:

• Annuities are low-risk investments with a fixed income. Hence, they may not offer high returns like other market-linked investment options
• Some types of annuity plans may not have the option of partial or early withdrawal

Understanding Tax Implications of Annuities in India

Below are the tax implications of annuity plans in India:

Taxability

Annuity income payments are fully taxable and taxed according to your applicable income tax slab for the financial year.

Tax benefit

You can claim a deduction of up to ₹ 1.5 lakh per financial year under Section 80C^* of The Income Tax Act, 1961, for the premiums paid toward the annuity plans.

Is an Annuity the Right Choice for You?

An annuity plan can be the right choice if you want to have an assured and steady stream of income during retirement. These plans offer regular payouts throughout the policy tenure, ensuring your financial security. Additionally, annuities offer deductions of up to ₹ 1.5 lakh on the premium paid under Section 80C^* of The Income Tax Act, 1961, making them tax efficient. They also provide the option to take a loan against the policy in emergencies and include a death benefit for added financial protection for your loved ones.

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Tax benefits on annuity

The premiums paid under the policy are allowed as deductions of up to ₹ 1.5 lakh per annum as per the conditions prescribed under Section 80C of the Income Tax Act, 1961.

Conclusion

An annuity plan is a versatile financial instrument, which helps you financially secure your post-retirement goals. You can choose from different types of annuity plans available as per your retirement needs. This will help you lead a stress-free retired life.

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