An annuity is a pension plan that helps you to get a regular income for life against a lump sum investment. The life insurance company that you choose to invest your money with invests your money and pays back the returns generated from it.
The ultimate goal of a robust retirement planning is not about earning a high investment return, but actually, be able to peacefully meet every financial goal post-retirement. It is crucial to have a regular flow of income to pay for essential monthly expenses and not become economically dependent on others.
Types of Annuities
Depending on when you buy them, annuity plans can be divided into two different categories: Deferred Annuity and Immediate Annuity.
Deferred Annuity
Under deferred annuity plans, you make a one-time lump-sum investment to purchase an annuity plan and defer the payout until sometime in the future–mostly until the time you retire. Once you retire, you start receiving monthly income as a pension on the invested corpus.
When you invest in a deferred annuity plan, you do not necessarily have to turn the entire corpus into annuity–a systematic stream of income. One of the most important benefits to investing in deferred annuity plans at the right age is that you can lock-in the future rate of interests without worrying about the drop in the rate of interest a few years later.
Under a deferred annuity plan, you make a one-time investment and wait until you retire or turn 60 to start receiving the pension. For instance, if you are 50-years old and invest a lump sum amount of INR 50 lakh in a deferred annuity plan. Now when you turn 60, you will start receiving INR 45,400 as monthly pension for life and on your death your financial dependents will receive the purchase price or invested amount as lump sum i.e. INR 50 lakh.
Immediate Annuity
When investing in an immediate annuity plan, instead of paying a number of premiums for a predefined time, you invest a lump sum amount with the insurer. The plan that you choose to invest in later pays you a regular guaranteed payout for life. An immediate annuity plan is the best buy for someone who has recently retired and has a corpus ready to make a one-time investment and start receiving a monthly income right away.
Under an immediate annuity plan, if you invest INR 50 lakh for buying a plan that covers both you and your wife (joint life cover), from the very next month of investing your money, you start receiving a pension of INR 25,600. You will continue to receive this pension until you are alive.
However, on your death, your wife will start receiving the same amount until she is alive. Post the death of both–you and your wife–your financial dependents will receive the entire invested amount i.e. INR 50 lakh as a lump sum. These features are only available in joint life covers with the return of purchase price variant of immediate annuity plans.
Annuities You Can Choose From
Joint Life Annuity with Return of Purchase Price
Joint life annuity plan with return of purchase price is the most bought annuity plan under the pension products category. Under this plan, the policyholder receives a fixed monthly income for life upon the amount invested.
On the death of the policyholder, the spouse starts receiving the monthly income on behalf of the policyholder. The pension further remains active until the death of the spouse. On the demise of both policyholder and spouse, the financial dependents of the policyholder receive the entire invested amount as a lump sum without any deduction. However, while buying this plan, it is important to note that the pension received under joint-life annuity is lower than other variants as the pension is divided amongst two individuals.
These plans are good for people with limited monthly expenses and for those who wish to leave significant wealth for their children.
Life Annuity with Return of Purchase Price
Another popular variant of immediate annuity plans is life annuity with return of purchase price. This plan works in a similar way as a joint life annuity plan works but the only difference is that under this variant only the policyholder receives the pension for life.
On the death of the policyholder, the financial dependents–spouse and kids–receive the purchase price, i.e., the entire invested amount as a lump sum. The dependents can use this amount to pay for daily expenses and pay for other financial expenses like retirement planning of the spouse. Moreover, some plans even give the option of receiving the purchase price in easy monthly instalments. Under this variant, the pension received every month is significantly higher than joint life cover.
Before you make an investment in an annuity plan, it is important to note that the pension received on annuity plans is not tax-free. The policyholder needs to pay tax on the pension as per the guidelines of the federal government. In addition, while investing in an annuity plan, it is very important that you evaluate your insurer well in advance on several important parameters, as this is a lifelong investment.
Is an Annuity Plan a Good Investment?
Annuity plans are among the most trusted sources for a guaranteed fixed income for retirement due to four main reasons.
- You can choose to buy annuity plans at any time in your life. While some may buy as they approach their retirement age as they may have investment corpus ready, some may choose to invest in annuity plans during their mid-career, especially those who plan to secure their assets.
- You can lock-in the rate of interest on your annuity plan. Annuity plans eliminate the reinvestment risk as you can lock-in the interest rate for your entire life while buying the product. With ever-changing interest rates and the current low interest rates regime, having a product that guarantees you income for life on the same interest rate becomes pivotal. Say, you are a 62-years old individual and plan to buy an annuity plan with the annual compensation ranging between 5-6 percent of the amount invested. After a few years, let’s say 8-10 years later, if the interest rates fall down to 3-4 percent, you will continue to receive the same interest rate at which you initially invested your money.
This helps annuity plans outperform other investment options.
For instance, in the present market scenario, where interest rates on most investment instruments are falling drastically, the current rate of interest on bank fixed deposits (FDs), which is the most favoured investment instrument amongst Indians planning retirement, is very low compared to historical standards. The interest rate was 8.5 percent in 2014 and has reached an all-time low of 5.4 percent in 2021. For anyone, who had an FD of INR 10 lakh with an interest of say INR 25,000 per quarter, will now get INR 18,000 per quarter or even less if the rates fall further in the coming time.
- There are no investment caps on annuity plans. This is unlike the other schemes such as the Senior Citizens Savings Schemes, in which you can invest as much as INR 15 lakh and the Post Office Monthly Income Scheme, where the maximum investment is capped to INR 4.5 lakh.
- You can be assured of a regular flow of income. For anyone investing money to hedge longevity risk, an annuity plan can be the best pick. Annuities give you the promise of stable income at a rate of interest at par with most other investment instruments. You could consider annuity plans to be a part of your retirement portfolio as it brings stability with regular flow of income.
Where Can I Buy An Annuity Plan?
There are a myriad of life insurance companies offering both immediate annuity and deferred annuity plans. Customers have the choice of picking one as per their specific needs and requirements. Immediate annuity plans can be chosen from various insurance companies including HDFC Life Insurance, Max Life Insurance, Bajaj Allianz, Tata AIA, ICICI Prudential, PNB MetLife, Canara HSBC OBC, Kotak Life and SBI Life. All these plans come with the variants of “Only Pension”, “Pension for Life” and “Pension for Life with Return of Premium”. You can choose any of these variants only for yourself or a joint cover for you and your wife.
Under the deferred annuity plans category, you have a plethora of insurers and plans to choose from including Bajaj Allianz, Max Life Insurance, ICICI Prudential, HDFC Life, Tata AIA, Canara HSBC OBC and IndiaFirst.
Buy Online to Earn Extra Pension
When making an online purchase of products and services, you can easily compare the same products from different brands and choose one that rightly caters to your needs and requirements. This rationale is applicable to annuity plans as well.
When you buy annuity plans online, you have the choice of comparing the products on various parameters and you can even earn extra income. This is because when customers invest in annuity plans online or when they buy these plans online, they receive an extra payout of over 3% on the entire invested corpus.
For instance, Harish Goel, aged 60-years plans, to invest INR 75 lakh in an immediate annuity plan that promises pension for the lifetime along with the return of the entire corpus invested to the nominee. On buying this plan online after comparing it with different plans, Harish will receive a monthly pension or income of INR 38,340 that turns out to be INR 4,60,080 annually. However, had Harish bought the same plan offline through an insurance agent or bank, he would have received INR 37,090 as monthly income/pension that would be INR 4,45,080 per annum. Now by investing the amount online over a period of 40 years, he will receive an extra payout of INR 6 lakh over investing the money offline.
