Key Annuity Terms: Everyone Must Know About

What Is an Annuity Plan?

An annuity plan is a contract between you and an insurance company. You pay a certain amount of money to the company, and in return, they promise to give you regular income in the future. This income can be monthly, quarterly, or yearly. It helps you cover your expenses after you retire and no longer earn a salary. You can choose to get this income right away or after a few years.

Certain annuity plans allow you to include your spouse as a 2^nd annuitant. In the event of your passing, your spouse will continue to receive the payments. Annuity plans provide peace of mind by helping you manage your finances after retirement. If you’re just starting with retirement planning, familiarising yourself with key annuity terms can guide you to make informed decisions and prevent misunderstandings down the line.

Annuity Terminologies Everybody Should Know

Understanding a few key terms in annuity can make annuity plans much easier to grasp. These simple words will help you understand how your annuity plan works:

Accrued Interest

This is the interest earned on the money you keep in your annuity plan. It adds up over time, helping your savings grow while you wait to start getting payments.

Accumulation Phase

This is the time when you are putting money into your annuity plan. During this phase, your money can grow. It usually happens in deferred annuity plans.

Annuitant

The person who puts money into the annuity plan and receives the payments later is called the annuitant.

Annuitize

When you start getting regular payments from your annuity plan, it is called annuitizing. You change your saved amount into steady income.

Deferred Annuity

This type of annuity plan starts giving payments after a few years. You save money during the waiting period, and later, you get regular income.

Free Look Period

This is a short period after buying your annuity plan. You can read all the terms and cancel the plan if you change your mind, without any penalty.

Immediate Annuity

This is a plan where you start getting payments soon after you invest a lump sum amount. It usually starts within the first year.

Income for Life Annuity

This type of annuity promises to give you regular payments for as long as you live. It ensures you won’t run out of money in retirement.

Income for Two Lives Annuity

This annuity is for two people, usually spouses. If one person passes away, the other continues to get the payments.

Premium

The money you pay into your annuity plan is called the premium. It can be a one-time payment or made in small amounts over time.

Renewal Rate

This is the interest rate that the insurer sets at the end of a contract term for an annuity. It is dependent on G-sec (government security) rates.

Types of Annuity Plans

There are different types of annuity plans you can choose based on your needs. Each one works in a slightly different way. Here are five common types:

Immediate Annuity

An Immediate Annuity plan provides regular income immediately, typically within 1 month of purchase. It’s a suitable option if you are already retired and need money quickly.

Deferred Annuity

With this plan, you start getting payments after a few years. You can pay a lump sum or make small payments over time. This plan is useful if you are still working and want to plan for future income.

Fixed Annuity

In a fixed annuity plan, the amount of money you get each time remains the same, regardless of market fluctuations. This helps you plan your budget because you know exactly how much money you will get.

Variable Annuity

A variable annuity gives you payments that fluctuate based on the performance of the underlying investment funds linked to the annuity. If the market performs well, your returns can be higher. But there is also a chance the returns may be lower.

Lump-sum Annuity

This type pays out all the accumulated fund at once, in one payment. This is helpful if you have a big expense coming up.

FAQs

Do you pay tax on annuity income?

Yes, annuity income is usually considered taxable under the head "Income from Other Sources" as per the Income Tax Act, 1961, and is taxed as per the applicable income tax slab rates. It is added to your total annual income and taxed as per the applicable income tax slabIt’s a good idea to check current tax rules or talk to a tax advisor for clarity.

What are the different types of annuities?

There are five main types of annuities: immediate, deferred, fixed, variable, and lump-sum -time large withdrawals.

What's the difference between a pension and an annuity?

A pension is typically provided by your employer and pays retirement income relative to your years of service and salary. An annuity is something you purchase, using your savings or pension fund. It would also provide regular income. However, you control the purchase and terms.