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Pros and Cons of Retirement Annuities

Retirement annuities can be a secure way to make sure you don’t outlive your assets. But be careful of the drawbacks, such as high fees. Read on to know the pros and cons of retirement annuity.

  • Dec 21, 2021

The primary objective of any retirement planning instrument is to provide stable and risk-free returns in your golden years. An Annuity plan is one such instrument where the insured pays a lump sum to the insurer in return for a regular income or pension after retirement. But are they the right choice for retirement planning? Let’s wade through the pros and cons to find out. 

Pros and Cons of Retirement Annuities

The primary objective of any retirement planning instrument is to provide stable and risk-free returns in your golden years. An Annuity plan is one such instrument where the insured pays a lump sum to the insurer in return for a regular income or pension after retirement. But are they the right choice for retirement planning? Let’s wade through the pros and cons to find out. 

Pros of Annuities

The following are the advantages of choosing an annuity plan for your retirement.

1.Safety of Capital

Annuity plans are non-linked. So, they are entirely unaffected by the volatilities in the share market. Thus, the money invested in the annuities and the subsequent returns are completely risk-free. 

2.Guarantee of Fixed income for a Longer Duration

Annuity plans provide a guaranteed income after retirement. While other investment options, such as fixed deposits, do the same, you must renew your deposits every year. And if the bank interest rates fall due to economic or other changes, you may get lower returns on your capital on every renewal. This can lead to faster erosion of your capital and depleting your pension. 

With annuities, however, you don’t have to renew your investments. The rate of interest remains fixed. Therefore, once you buy an annuity, you will immediately know the time, frequency, and amount of pay-out that you will get on retirement. These parameters will remain unchanged.

Hence, you are guaranteed to have a fixed and stable source of income after retirement. This, in turn, can help you in having a clear picture of your finances and how to manage different expenses during your golden years.

3.Multiple Options of Investment

You can buy either an immediate annuity plan or a deferred annuity plan depending upon your retirement goals. In an immediate plan, your pension starts almost immediately after you buy the plan. In a deferred annuity, you can determine the deferment period from 1 to 10 years. Your pension begins on completion of the deferment period.

There are multiple sub-options to choose from within these two options, giving the insured a wide range of choices. Similarly, you also have a choice when it comes to getting your income after retirement. 

The Cons of Annuities

.While annuities can provide a substantial advantage, as discussed earlier, they do have their share of disadvantages that you should be aware of. 

1. Lower Interest Rates and Capital Appreciation

This is a compromise you make for prioritising safety. The annuities pay relatively lower interest rates on the invested amount. Also, they are generally non-participating in nature. Thus, you do not get the share of the profits of the insurance firm. Moreover, as the money is not invested in the stock market, your investments will have significantly lesser capital appreciation chances.

2.Low Liquidity

Once invested, you are not allowed to withdraw the principal amount or surrender the plan prematurely. So, it would help if you stayed invested till your retirement.

3.No Income Tax Relief

The pay-outs received from annuities are taxable as per the various income tax slabs for the individual taxpayer. Therefore, you can’t claim any tax relief on annuities. 

So, Are Annuities Good for Retirement? 

Absolutely, yes. While they have their share of pros and cons, just like any other investment instrument, they can provide the much-needed financial support in the retirement years. However, it is essential to not rely on annuities for your retirement planning solely. Instead, build a robust portfolio that contains a healthy mix of investment, insurance and savings to ensure you never run dry in your golden years. 

In this policy, the investment risk in the investment portfolio is borne by the policyholder.

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- A Consumer Education Initiative series by Kotak Life

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