Annuity Plans

Retirement is considered a time of enjoyment and relaxation after years of hard work. However, there is one fact that cannot be denied: you still need a regular source of income during that phase. It will help you to fund your leisure activities post-retirement and ensure financial stability for your loved ones. But how can you do so? Annuity planning is the way to go! Whether you are approaching retirement or planning ahead, understanding how annuities work will help you secure a comfortable future.​

What are Annuity Plans?

Annuity plans may seem complex at first. In reality, they can be simply understood as contracts between you and financial institutions like insurance companies. When you buy these retirement plans , you make premium payments in installments or lump sums. The financial institution then invests that money in specified securities, creating your retirement corpus. The goal is to grow your investment so that, when you retire, you receive a steady stream of income periodically.

Why do You Need a Pension Plan?

A pension plan, such as an annuity, is essential for covering post-retirement expenses. The need for such plans arises because you will still have bills to pay after you stop earning a regular salary.

In fact, retirement often brings about a different set of expenses. Medical costs tend to rise with age, and you might face additional expenses related to healthcare, medications, and possibly even long-term care. Inflation also plays a role in increasing the cost of living, affecting everything from daily necessities to occasional splurges.

A guaranteed pension plan ensures that you can meet these expenses without depending on anyone or depleting your savings. You just have to start putting aside a part of your income while you are still earning and investing in the pension plan. The plan will then come to your rescue post-retirement with a steady income source. In this way, you can maintain your standard of living without financial strain.

How Does Annuity Work?

There are different kinds of annuity plans in the market with varying terms. For instance, some plans allow you to invest in installments while others require lumpsum investment. Similarly, you can either receive a fixed income every year or market-linked variable returns. The timing of the payout can also differ. Deferred plans pay after a gap, while immediate plans start paying as soon as you invest.

Though the details of every plan may differ, the fundamental elements remain the same. This can be explained by the following example:

Total Contribution Amount

Suppose you start investing in an annuity plan at the age of 40, making a monthly contribution of ₹20,000 for 20 years. The total contribution amount in this case will be ₹48,00,000.

Interest Rate

This is the rate at which the financial institution will invest your money during the accumulation phase. Let’s assume that it is 6% in the example. Thus, with ₹48,00,000 invested @6% for 20 years, you will have a corpus of ₹92,87,022 by the end of 20 years.

Annuity rate

The annuity rate is a percentage used by financial institutions to determine how much regular income you will receive from total savings. You can assume it to be 10% per annum here. Once you retire at the age of 60, the annuity rates will be locked in. Thus, the total annuity amount will be 10% of ₹92,87,022 per year, i.e., ₹928702.2.

Pension Amount

Let us assume that you choose a monthly payout frequency. This means you will receive a total monthly pension of ₹77,392 (₹928702.2/12).

What are the Benefits of Annuity

Are annuity pension plans even required to be included as part of your financial strategy? Yes! A look at their benefits will help you understand why they are a must-have for proper retirement planning.

Regular Income

As already mentioned, annuity planning provides you with a steady stream of income post-retirement. Thus, you do not have to compromise on your basic needs and lifestyle. Moreover, a regular income source provides certainty and peace of mind. You can set your budget and goals reliably.

Tax Benefits

Further, the government has introduced provisions to reduce the tax burden on the premium payments under annuity plans in India. Under Section 80CCC, you can claim deduction up to ₹1,50,000 on the investment made in pension or annuity funds. This leads to additional savings.

Guaranteed Returns

Another point to consider is that annuity pension funds are low-risk investments. They are not affected by market volatility. With fixed annuities, you are assured of a guaranteed return for the rest of your life.

Additional Benefits

Certain annuity plans can also offer benefits such as a joint-life option. This option allows you to secure your spouse’s retired life through the annuity. Similarly, a death benefit can also be included in the annuity to safeguard the future of your loved ones in case of your unfortunate demise during the policy term.

What are the Features of Annuity Plans?

Annuity planning offers improved financial security by combining regular income with low risks. This is indeed the key feature of annuity funds. However, there are other features that you must be aware of as well.

Payout Options

Depending on the type of plan you choose (e.g., lifetime annuity), you can receive payouts for a specific period or for the rest of your life. You can also customize the payout frequency, selecting monthly, quarterly, half-yearly, or annual payouts as per your financial needs.

Flexible Investment Mode

Annuity plans are known for their flexibility. You can opt for a lump sum payment, which allows you to invest a significant amount upfront and start receiving payouts sooner. Alternatively, you can choose to make regular contributions over a period of time, spreading out your investment.

Surrender Value

Do you know that you can choose to end the annuity plan even before maturity? In that case, you will receive the surrender value of the annuity. This value is influenced by factors such as the duration of the annuity and any penalties for early termination. While surrendering the annuity may lead to a lower payout than if you had waited until the plan’s maturity, it can allow you to access funds in case of emergencies.

Deferment period

When you buy an annuity plan, you can come across this term: ‘deferment period.’ It refers to the time period for which you can postpone receiving the income. During this time, your retirement fund will continue to grow.

Different Types of Annuity Plans

No discussion of retirement annuity plans is complete without discussing their two main types. Both of these plans ensure guaranteed returns. The key difference between them lies in when the payouts begin.

Immediate Annuity

An immediate annuity begins payouts right after you make a lump sum investment. In other words, there is no accumulation phase. You start receiving regular income, usually within one year of purchase. You should go for this plan if you are nearing retirement and need an immediate source of income.

Deferred Annuity

On the other hand, the payout begins at a future date in the case of a deferred annuity. During the deferment period, your investment grows. It is a suitable option if you still have time before retirement and wish to build a larger retirement corpus in the meantime.

Annuity Plans Based on Returns

Everyone invests in an annuity plan to earn regular returns. However, you can choose whether you want to earn a fixed return or a variable one.

Variable Annuity

You already know that the insurer invests your contribution in specified securities, such as stocks or bonds. Now, if you have chosen a variable annuity, your returns will fluctuate based on the performance of these underlying investments. You will receive greater returns if their performance improves, and vice versa. Market risks will thus influence the payouts. This plan is the right choice if you are willing to take some risk for potentially greater gains.

Fixed Annuity

A fixed annuity, in contrast, guarantees a specific, predetermined payout over time, regardless of market conditions. The returns are steady and predictable. They can be your go-to choice if you are a conservative investor who prefers a stable income without worrying about market volatility.

What are the Eligibility Criteria for an Annuity Plan?

Eligibility criteria for annuity planning may vary between insurance providers. Most insurance companies require the individual to be in the age range of 30-60 years to invest in an annuity plan. It is important to note here that the earlier you start, the more time your corpus will have to grow.

Further, certain documentation requirements may be there such as identity and address proof. Some annuity plans may also have a minimum investment amount. There may be restrictions in terms of citizenship as well. For instance, annuity in NPS account is available only to Indian citizens (resident, non-resident or an Overseas Citizen of India).

Factors to Consider Before Investing in Annuity Plans in India

Say you are interested in annuity planning and also meet the eligibility criteria. The next step is to research the market and opt for the best annuity plan based on important factors.

Payout Options

Consider whether you want immediate payouts or prefer to defer them until a later date. In other words, choose between an immediate annuity or a deferred one.

Rate of Return

Evaluate the interest offered by the plan to ensure it aligns with your expectations.

Annuity Type

Choose between fixed and variable annuity plans depending on your risk appetite and the need for stable or market-linked returns.

Flexibility

Some plans offer options like partial withdrawal or surrender value, which could be important during emergencies.

Fees and Charges

Annuity planning may come with various fees and charges that can impact your overall returns:

• Administration Fees: These are charges for managing your annuity plan.
• Surrender Charges: Fees imposed if you withdraw or terminate the plan before its maturity.
• Variable Annuity Charges: For variable annuities, there may be additional fees for investment management.

Review the fee structure carefully to avoid unexpected costs and ensure that the plan remains cost-effective over time.

Tax Implications

Understanding the tax implications of annuity planning is necessary for effective financial planning:

• Section 80CCC: This section of the Income Tax Act allows for deductions on contributions to pension plans up to ₹1,50,000 per annum. This can provide immediate tax benefits on your contributions.
• Taxation on Payouts: Annuity payouts are taxed as income according to your income tax slab. Plan your investments with these tax considerations in mind to optimize your tax efficiency.

Life Expectancy and Retirement Needs

Assess your life expectancy, financial requirements, and the duration of payouts to ensure you won’t outlive your annuity income.

Final Words

With all this information, you are ready to start your retirement annuity planning. Though it is recommended to start as soon as possible, you should not compromise on thorough research. Take your time to assess your current financial situation as well as retirement goals. This evaluation will be the foundation of your next steps and help you determine whether a particular plan is the best option for you.

FAQs on Annuity Planning