What is annuity?
The term ‘annuity’ essentially refers to a sum of money that is paid out to a person periodically, for the rest of their life. In the context of retirement planning and life insurance, annuity plans or pension plans are life insurance policies that allow you to enjoy regular income even after you have retired.
To know how much retirement annuity you will need to lead a comfortable life in your golden years, you can make use of a retirement calculator. Then, based on your specific needs and the requirements of your family, you can choose the suitable kind of annuity plan.
Want to find out more about the different types of annuity plans available to you? Check out the alternatives in the following section.
Different types of annuity
Based on the nature of payment of the retirement annuity, pension plans or annuity plans are of two major types.
Immediate annuity plans:
In immediate annuity plans, the annuity payments start right away. The insurance service provider agrees to pay the annuity amounts to the policyholder immediately after they have purchased the plan. This is why they are known as immediate annuity plans.
Deferred annuity plans:
In deferred annuity plans, the annuity benefits accumulate over the investment period. And then, the annuity payouts from the insurance company start at a later date, after a predetermined number of years following the purchase of the plan.
How do different types of annuities work?
To understand the different types of annuities better, let’s see how they work.
Immediate annuity plans:
- Here, the policyholder pays a lump sum amount to the insurance provider at the time of purchase of the policy.
- From the next month, quarter, or year, as the case may be, the insurer starts to pay out periodic annuity payments to the policyholder.
- There are different kinds of annuity options under this category, some of which are:
- Life annuity
- Life annuity with return of purchase price
- Joint life annuity
- Joint life annuity with return of purchase price etc
Deferred annuity plans:
- A deferred annuity plan has an accumulation phase and an income phase.
- The accumulation phase begins when you purchase the plan and ends on the date you choose to start receiving the annuity payments.
- During this phase, you invest in the plan and wait for your retirement corpus to grow. Note that this option is only available in select plans which have an option to pay on regular basis.
- Then, when the income phase begins, you receive monthly payouts
Features of an Annuity
An annuity has some useful features that make it a good choice for your retirement planning. Let’s look at its three main features.
Safe investment option
An annuity plan especially a fixed annuity is considered a safe option to secure post-retirement income. You receive a predictable amount at regular intervals, making it a suitable choice for those seeking financial stability and peace of mind after retirement.
Financial security
After you retire, your regular income stops. But your needs don’t. An annuity helps you get money regularly. With the regular payout, you can pay for food, bills, and medicine without any worry. It helps you live with dignity and freedom.
Flexibility
Annuity plans give you many options. You can choose when you want to start getting money. You can also pick how often you want to receive it—monthly, quarterly, half yearly or yearly.
Benefits of Different Types of Annuities
Let’s look at the two main kinds — Immediate annuities and Deferred annuities — and see how they can help you.
Benefits of Immediate Annuities
An immediate annuity gives you money right after you buy it. You pay a lumpsum amount one time (like your savings or retirement money), and then the insurance provider starts making scheduled payments to you.
This type of annuity is good if you are already retired or about to retire soon. It helps you get money every month or every three months, just like a salary.
It gives you peace of mind. You don’t have to worry about where your next money is coming from. The amount is fixed and is not affected by the ups and downs of the market. It’s a good choice for people who want a simple, steady income without taking risks.
Benefits of Deferred Annuities
A deferred annuity is for people who are still working and want to save for later. You start giving money now—either all at once or in parts—and you get payments later, maybe after 5, 10, or 15 years.
Your money grows during this waiting time. The longer you wait, the more you can get later. This is useful if you want income after retirement but don’t need it right away.
You can also choose frequency to get the payments. It gives you time to build a bigger savings amount. Some deferred annuities even give your family money if something happens to you before the payouts begin.
How Do the Different Types of Annuities Function?
Annuity plan are plans that give you money regularly. But not all annuities work the same way. Let’s look at some types of annuities and how they work. This will help you choose the one that suits your needs best.
Life Annuity
A life annuity gives you money for as long as you live. You choose how often you want the money—every month, every three months, or once a year. This type is helpful because you don’t have to worry about your savings running out. The money keeps coming for your whole life, no matter how long you live.
Life Annuity with Refund of Purchase Amount
In this plan, you get money for life, just like a life annuity. But there’s one extra benefit. When you pass away, the amount you paid at the beginning is given back to your family. This way, your loved ones also stay protected. It is a good choice if you want to leave something behind for them.
Annuity Paid for a Set Period
This plan gives you money for a fixed number of years, like 5, 10, or 20. Even if something happens to you, your family will still get the money for the for remaining period of the policy. After the chosen time ends, the payments stop.
Annuity for Surviving Joint Life
This type covers both you and your spouse. You keep getting the money as long as either one of you is alive. So even if one partner passes away, the other still gets the income. It gives you both peace of mind and makes sure your partner will be taken care of.
Factors to Consider While Choosing a Suitable Annuity Plan
When you plan your retirement, choosing the right annuity is very important. An annuity can give you regular income when your salary stops. But not all annuity plans are the same. You must check a few simple things before buying one. Let’s look at them one by one.
Secure investments
The first thing to check is how safe your money will be. Annuity plans are for long-term needs, sometimes for 20 or 30 years. So, the plan should be stable. It should give you regular payments without delays.
Choosing a safe and trusted plan ensures you get your money on time. A secure investment keeps you stress-free during your retirement years.
Rate of return
The rate of return means how much money you get back from the plan. It’s important to pick a plan that gives you enough income. Think about your maintenance—food, bills, medicines, and more.
Also, remember that prices go up with time. This is called inflation. What looks like enough today may not be enough 10 years later. So, look for a plan that gives a good return. Some plans offer fixed returns, and others offer returns that can grow with the market.
If you are not comfortable taking risks, a fixed return plan is better. Just make sure the plan helps you meet your future needs.
The performance history of the insurance provider
Always buy an annuity plan from a trusted insurance company. Check how long the company has been around. You can visit their official website to learn more.
You may also ask friends or look at customer reviews. This tells you if people are happy with the company’s service. A strong company with a good history means your money is in safe hands.
Choosing the right type
There are different types of annuities in insurance. To choose the best one, you need to understand your needs first. Think about your age, when you want the payments to start, and how much income you need. You also need to think about whether you want fixed income or income that can grow.
Let’s look at the four main types of annuities:
Immediate Fixed Annuity
This plan starts paying you right after you buy it. You pay a lump sum once, and then you start getting fixed income regularly. The amount stays the same. It’s a good option if you’re retiring soon and want a steady income.
Deferred Fixed Annuity
This plan starts paying you later. You can buy it now and start receiving payments after 5, 10, or more years. The income is fixed. This is good for people who are still working and want to prepare early for retirement.
Choose the plan that fits your comfort level and financial goals.
Who Should Buy an Annuity Plan?
An annuity plan is a good choice for someone who wants regular income after they stop working professionally. If you are worried about how to manage your monthly expenses after retirement, an annuity can help.
This plan is helpful for people without a pension or for those who want extra income besides savings. It gives you peace of mind because you know you’ll receive money every month.
Annuity plans are also good if you want to take care of your spouse or leave something behind for your family. If you want a safe and steady income in your later years, you should consider buying an annuity.
What is the Best Time to Buy an Annuity Plan?
You can buy an annuity at any time, but the best time depends on your needs. If you are close to retirement or have already retired, you can choose an immediate annuity. You pay a lump sum and start receiving income right away.
If you are younger and still working, you can buy a deferred annuity. You pay now (either once or in small amounts), and start getting income later, like when you turn 60 or 65.
Buying early gives your money more time to grow. This means higher payments later. It also helps you plan better.
The earlier you start, the more prepared you’ll be. So, if you want regular income after retirement, start planning as soon as you can.
What Are the Tax Implications of Annuities?
Annuity plans may offer tax benefits under the old tax regime. The premiums paid towards certain qualifying annuity plans can be claimed with a deduction of up to ₹1.5 lakh per year under Section 80CCC, which is a part of Section 80C of the Income Tax Act. However, the annuity payouts you receive are taxable as income.
*The tax benefits under Section 80C and Section 80CCC are available only under the old tax regime.However, the money you receive later from the annuity is treated as your income. This income is added to your total income and taxed as per your income slab.
Also, if you withdraw money early from some types of annuities, you may face extra tax or penalties. Always check the tax rules before buying.
What is the Surrender Period?
The surrender period is the time during which you cannot take money out of your annuity plan. The period usually depend on the plan.
If you try to take out money before this time, you may have to pay a penalty. After the surrender period ends, some plans allow you to take out the full or partial amount.
Make sure you understand the surrender terms before buying. Choose a plan that gives you some flexibility in case of emergencies.
FAQs on Annuity Plans
Which kind of annuity plan is suitable for me?
If you are closer to retirement and want to replace your regular income with annuity payouts, an immediate annuity plan is more helpful. On the other hand, if you have a significant working life ahead of you, you could choose deferred annuity as your option.
Do annuity plans offer tax benefits?
Yes, they do. The contributions you make to your pension plan are eligible for deductions as per section 80CCC of the Income Tax Act, 1961 subject to the provisions stated therein. The limit on this is Rs. 1.5 lakh per financial year.
Will my annuity plan also cover my spouse?
To include your spouse in your annuity plan, you can choose the joint life option when you purchase your annuity plan.
So, what are you waiting for, consider planning for your retirement goals now and secure your future with retirement annuity plans.
How does an annuity plan work?
An annuity plan is simple. You give money to the insurance company—either in lumpsum or small amounts over time. In return, the company gives you regular payments. These payments can start right away or after a few years of your retirement, depending on the type of annuity you choose. You can receive the money every month, every three months, every six months or once a year. This helps you manage your expenses after retirement.
What is the rate of return in an annuity?
The rate of return means how much money you get from your annuity compared to what you paid. Some annuities give fixed returns, so you know exactly how much you will get. Others depend on the market, so the return may go up or down.
How much do I need to invest in an annuity?
There is no fixed amount you must pay. It depends on how much income you want later. If you want higher monthly payments, you need to pay more at the start. You can pay once or in small parts over time. Calculate your monthly needs—like food, rent, and health care—and then decide how much to invest for a comfortable retirement.
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