An annuity is an investment option that provides a guaranteed and specified income for an individual throughout their retirement.
The actual amount will depend on the amount invested, the tenure it has been invested for, and the investment strategy.
Deepak Khemani, personal finance expert and health insurance adviser, explains it in detail.
Who offers annuity plans?
They are offered by life insurance companies.
What is the benefit?
They are a great way of securing a guaranteed and regular income for life. This offers a great deal of stability to one’s cash flow and concerns about financial stress in retirement.
There are tax benefits at the time of investing.
There are also options to customise the plan as per your needs or flexibility in choosing the frequency and type of income.
You can choose when you want to start receiving your income, either immediately or at a later date. Moreover, the income you receive depends on the amount you invest, the annuity rate, and the type of annuity plan you choose.
What are the types of annuity plans?
In India, there are basically just two types of annuity plans.
Immediate annuity is when you pay a lump sum and start receiving the income right away. This income is fixed or increases, depending on the plan chosen. However, it is guaranteed for life.
Deferred annuity is when you pay a lump or make regular contributions for a fixed period and defer your income until a future date. The amount accumulates until the chosen period. The income, once started, is fixed and guaranteed for life.
What is the annuity rate?
The annuity rate is the percentage that is paid back to you every year as income. For example, if you invest ₹10 lakh in an immediate annuity plan with an annuity rate of 7%, you will receive ₹70,000 every year for life as annuity or pension.
The annuity rate depends on factors such as your age, type of annuity plan, and prevailing interest rates. The older you are, the higher the annuity rate. This is because the life expectancy is lower for older people, so the insurance company pays more to them.
Does this apply to individuals or a couple?
A single life annuity plan pays income only to you for your lifetime. A joint life annuity plan pays income to you and your spouse for both your lifetimes.
A joint life annuity plan ensures that your spouse continues to receive income after your death.
Your annuity income also depends on the plan you opt for - single life annuity plan or joint life annuity plan. The annuity rate for a joint life plan is lower than that for a single life plan. This is because the insurance company has to pay for two lifetimes instead of one.
Are there variations?
Some annuity plans also offer the option of return of purchase price (ROP). The lump sum paid or accumulated will be returned to nominee after your death or spouse's death (in case of a joint life plan).
This option will reduce your annuity rate and income.
When must I opt for it?
Before buying an annuity plan, consider your financial goals, risk appetite, retirement age, expected lifespan, and other sources of income.
You should also compare different annuity plans from various insurance companies and choose the one that suits you best.
Having said that, the best way to maximise your annuity income is to buy early. The earlier you buy an annuity plan, the longer you can enjoy its benefits. Let’s say you buy a deferred annuity plan at the age of 40 to start giving you an annuity at the age of 50. For 10 years, the money will be invested and appreciate and you can get a higher annuity. Or, let’s say an individual buys the annuity at the age of 50 and lives till 80. That is 30 years of annuity. But had he bought it at the age of 60, he would get just 20 years of annuity.
Buying early also helps you lock in higher annuity rates, as they tend to decrease over time due to falling interest rates.
What are the drawbacks I must be aware of?
Low liquidity and exit options.
No capital appreciation of money invested.
The annuity amount stays constant, hence no inflation protection.
Income received is taxed.
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