Annuity Plans: A Comprehensive Guide

Overview of Annuity Plans

 

Retirement planning is essential since your income might stop in old age but your expenses won’t. Thus, it is recommended to accumulate a retirement corpus while you are working so that you can live out your golden years comfortably.

While wealth accumulation for retirement is important, it is equally important to invest in an avenue that pays regular income in your old age. This income payout can help you meet your financial expenses.

An annuity plan helps in both these aspects. There are two types of annuity plans and you can choose, one to accumulate wealth, and second, to create a guaranteed* source of income payouts. Now let’s understand what an Annuity Plan is. Annuity plans are retirement-oriented life insurance plans which help in saving up for retirement and also guarantee^* annuity payouts.

 

Benefits of Annuity Plan

 

The benefits of life insurance annuity plans are as follows –

1. Helps in retirement planning

The primary annuity plan meaning is to help meet your financial needs post-retirement. With annuity plans you can accumulate a retirement corpus and also ensure guaranteed* and lifetime annuity payouts. Thus, you can secure the financial needs of your golden years by investing in an annuity policy.

2. Different variants for different needs

Annuity plans are offered in two variants. The first variant is the deferred annuity plan that helps you accumulate a corpus for your retirement. You can buy the policy when you are working and save up over a long-term horizon to create a good corpus.

The second variant, the immediate annuity plan, starts annuity payouts immediately after you buy the policy. So, if you have a ready retirement fund from which you are looking for annuity payouts, the immediate annuity plan would help you achieve your goals. Individuals can choose the preferred variant that can help them plan for their retirement effectively.

3. Different types of annuity options

Immediate annuity plans offer different types of annuity payouts. You can choose to receive a uniform annuity, increasing annuity, joint life annuity, etc. This helps you choose a payout that best matches your financial needs and secure your retirement.

4. Tax benefits

Annuity plans also offer tax benefits. Here’s how –

• The premium paid for annuity plans for receiving annuity from the fund referred in Section 10(23AAB) of the Income Tax Act, qualifies for tax deduction under Section 80CCC up to ₹1.5 lakhs¹.
• The premium paid for immediate and deferred annuity policies are eligible for deduction upto Rs. 1.50 lakhs under Section 80C of the Income Tax Act, 1961.
• You can commute up to 60% of the accumulated corpus on vesting under deferred annuity plans5. Such commutation received is tax exempt in the hands of recipient. For instance, if the accumulated corpus is ₹30 lakhs, you can commute up to ₹18 lakhs, which will be tax-free in the hands of recipient.

 

Features of Annuity Policy

 

Some of the salient features of annuity plans are as follows –

1. Annuity plans are not market-linked, hence the risk factor is low. Hence these are typically safe.

2. These plans provide income for life and hence can offer financially independence in your golden days

3. These plans are flexible. You can choose how you want to receive your income – monthly, quarterly, half-yearly or yearly.

 

Types of Annuity Plans:

 

Besides understanding the annuity plan meaning, it's important to understand the types of plans available. There are two types of annuity plans, as stated earlier. These plans are as follows –

1. Deferred annuity plans

These plans are savings-oriented annuity plans that aim to create a retirement corpus over the chosen policy tenure. You can pay the premium regularly, for a limited tenure or in a single instalment when buying the policy. The premium is accumulated into a retirement corpus. Some deferred annuity plans may also offer a death benefit if the life assured passes away during the policy tenure. However, if the life assured survives the tenure, the policy vests and a vesting benefit is paid.

On vesting of a deferred annuity plan, you can choose from different payout options. Some of these options are as follows –

• Commuting up to 60% of the corpus and receiving the remaining corpus in the form of a deferred or immediate annuity from the same insurer or from another insurer
• Receiving the whole corpus in the form of deferred or immediate annuity from the same insurer or from another insurer

2. Immediate annuity plans

As the name suggests, immediate annuity plans are those wherein the annuity payment starts immediately after you buy the policy. A single premium is payable to buy immediate annuity plans. This premium is called the purchase price. You can choose to receive the annuity yearly, half-yearly, quarterly or monthly depending on your needs.

There are different annuity payout options available under immediate annuity plans. Some of the common payout options are as follows –

• Annuity with ROP on death
• Increasing pay annuity
• Level annuity
• Annuity payable for guaranteed^* time
• Annuity for life
• Joint life annuity
• Annuity with ROP on survival

 

Which Annuity Plan Is Most Suitable for You?

 

The choice of the most suitable annuity plan depends on your financial needs and retirement goals. A deferred annuity plan is suitable if –

1. You have time to plan for your retirement

2. You are still working and want to accumulate a retirement corpus

On the other hand, if you are nearing retirement and want a plan that guarantees* annuity payments starting soon, you can choose immediate annuity plans. Choose a suitable annuity payout option and frequency and you will start receiving annuity payouts immediately (of after a specified time) after buying the policy.

Furthermore, the immediate annuity plan is suitable if you have already created a retirement corpus or if you have a lump sum corpus at your disposal to invest and start receiving annuities.

 

How to Select an Annuity Plan?

 

Some tips for selecting an annuity plan are as follows –

1. First, choose the type of annuity plan which would best match your retirement planning needs

2. Choose a suitable sum assured with the deferred annuity plan so that the death benefit is optimal to fund your family’s financial needs in your absence.

3. Assess the annuity amount based on the policy details you choose. The annuity amount should be suitable to fulfil your financial needs after retirement.

4. Choose riders with deferred annuity plans to enhance the scope of protection

5. Choose a suitable tenure under the deferred annuity plan so that you can create an optimal retirement corpus and get the funds when you need them

6. When choosing an immediate annuity plan, choose the right annuity option to receive the annuities to fulfil your needs

 

What Is the Best Time to Buy an Annuity Plan?

 

The best time to buy an annuity plan again depends on which policy you choose. If you are choosing a deferred annuity plan to create a retirement corpus, the sooner you buy the policy the better. This is because when you start early, you can choose a long policy tenure. This would help you earn better returns on investments. Moreover, as the tenure increases, compounding works wonders and helps in growing the corpus. A longer policy tenure also allows you to save affordably and still build up a suitable corpus for retirement.

In the case of immediate annuity plans, you can buy the plan when you are close to retirement so that as your income stops, the annuity payouts compensate for the lost income.

 

Conclusion

 

Do not ignore retirement planning as it helps secure your finances during your golden years. So understand the various types of annuity plans and make an informed decision before choosing an annuity plan.

 

FAQs

 

1. Are there any age restrictions for purchasing annuities?

If you are buying a deferred annuity plan, there might be a minimum and maximum age limit to buy the plan. For immediate annuity plans, however, there’s usually no maximum age limit and even if there is, the plan is available at very old ages too. You can check the age limits on the policy you buy since the restrictions vary across policies.

2. How do annuity plans affect taxes?

Buying an annuity plan, be it deferred/immediate annuity plan allows a tax deduction up to ₹1.5 lakhs¹. The limit includes the limit allowed under Section 80CCC and Section 80C. If you commute the vesting benefit, such commutation is tax exempt under Section 10(10A)² of the Income Tax Act.

Annuity payments received from annuity plans are also taxed at your slab rates since they are considered regular income.

3. Is it possible to transfer an annuity plan to a different provider³?

An annuity can be cancelled or transferred to another Annuity service provider only within the free look period as per terms and conditions of the Annuity policy and not after the free look period ends.

References

1. https://cleartax.in/s/section-80ccc

2. https://taxguru.in/income-tax/exemption-commuted-pension-section-10-10a.html

3. https://www.npscra.nsdl.co.in/faq-annuity-related.php#:~:text=Once%20an%20Annuity%20is%20purchased,by%20the%20IRDA)%20by%20the

4. https://www.livemint.com/money/personal-finance/annuity-options-you-can-consider-before-planning-your-retirement-11635093514948.html

5. https://www.pfrda.org.in/writereaddata/links/presentation%20-%20corporate%20nps%20-%20website%20aug2022d6524d42-3f69-44ad-8830-2bc7dde27c0e.pdf

Information Gathered from –

1. https://www.livemint.com/money/personal-finance/what-are-annuity-plans-how-they-work-11611738824676.html

2. https://www.valueresearchonline.com/stories/15017/everything-you-need-to-know-about-annuity-plans/

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