Retirement Planning with Annuities

An annuity is a type of pension plan that allows you to receive a fixed income for the rest of your life in exchange for a lump-sum investment. The life insurance firm you choose to invest your money in invests it and pays you back the profits.


The ultimate aim of comprehensive retirement planning is not to generate a high investment return but to satisfy all financial goals after retirement peacefully. It is critical to have a consistent income source to pay for basic monthly expenses and avoid becoming economically dependent on others.


Annuity Types


Based on when they’re purchased, annuity plans are classified into two types: Deferred Annuity and Immediate Annuity.


Deferred Annuity


Deferred annuity plans require you to make a one-time lump-sum payment to acquire an annuity plan and defer the payout until a later date – usually when you retire. When you retire, you begin receiving monthly income from the invested corpus as a pension.


When you invest in a deferred annuity plan, you do not have to convert the entire corpus into an annuity – a regular flow of income. One of the most important advantages of investing in deferred annuity plans at the right age is that you may lock in future interest rates without worrying about a decline in interest rates a few years later.


A deferred annuity plan requires you to make a one-time payment and wait until you retire or reach age 60 to begin receiving the pension. For example, suppose you are 50 years old and invest a lump sum of INR 50 lakh in a deferred annuity plan. When you turn 60, you’ll begin receiving INR 45,400 as a monthly pension for the rest of your life. Upon your death, your financial dependents will get the purchase price or invested amount as a lump sum, i.e., INR 50 lakh.


Immediate Annuity


When you invest in an immediate annuity plan, you invest a lump sum payment with the insurer rather than paying a series of premiums over a certain period of time. The plan in which you decide to invest provides you a lifelong regular guaranteed payment. An immediate annuity plan is the best option for someone who recently retired and has enough money to make a one-time investment and begin receiving a monthly income immediately.


If you invest INR 50 lakh in an immediate annuity plan to purchase a plan that covers both you and your spouse (joint life cover), you’ll start receiving a pension of INR 25,600 the very next month. You’ll keep receiving this pension for as long as you live.


However, if you die, your spouse will begin receiving the same amount until they’re alive. Following your and your spouse’s deaths, your financial dependents will get the whole invested amount, i.e., INR 50 lakh, as a lump sum. Such features are only available in joint life insurance policies with a return of purchase price variant of an immediate annuity plan.


Annuities You Can Choose From 


Joint Life Annuity with Return of Purchase Price


The most popular annuity plan in the pension products category is the joint-life annuity plan with purchase price return. With this plan, the policyholder receives a lifelong fixed monthly income based on the amount invested.


Upon the policyholder’s death, the spouse begins receiving the policyholder's monthly income. The pension will continue to be paid until the spouse dies. When both the insured and the spouse die, the policyholder's financial dependents get the entire invested amount as a lump payout with no deductions. However, while purchasing this plan, keep in mind that the pension obtained under joint-life annuity is lower than that of other variants since the pension is split between two people.


These plans are ideal for those with low monthly costs and those who want to leave a substantial inheritance to their children.


Life Annuity with Return of Purchase Price


Another common variant of an immediate annuity plan is life annuity with a return of purchase price. This plan functions similarly to a joint-life annuity plan, with the sole distinction being that only the policyholder receives the pension for life under this plan.


Upon the policyholder’s death, the financial dependents – spouse and children – receive the purchase price, i.e., the entire invested amount, in a lump payout. The dependents can use this money to cover everyday costs and other financial obligations, such as the spouse's retirement planning. Furthermore, some plans allow you to receive the purchase price in convenient monthly installments. The monthly pension received under this variant is substantially more than the monthly pension received under joint life cover.


Before you invest in an annuity plan, keep in mind that the pension earned from an annuity plan is not tax-free. The policyholder must pay pension tax per federal government rules. Furthermore, because this is a lifelong commitment, you must evaluate your insurer beforehand on numerous key factors.


Is Investing in an Annuity Plan a Good Idea?


Annuities are one of the most trusted forms of a guaranteed fixed income for retirement for four significant reasons.


  1. You can purchase annuity plans at any point in your life. While some might purchase when they are near retirement age because they have a ready investment corpus, others, particularly those who wish to secure their assets, might rather invest in annuity plans during their mid-career.

  2. You could lock in your annuity plan’s interest rate. Annuity plans remove reinvestment risk since you may close in the interest rate for your whole life when you purchase the product. With interest rates constantly fluctuating and the present low-interest rate regime, having a product that guarantees you a lifelong income at the same interest rate becomes crucial. Assume you are 62 years old and intend to purchase an annuity with an annual payout of 5-6% of the invested amount. If interest rates decrease to 3-4% after a few years, say 8-10 years, you will still get the same interest rate as when you first placed your money.


This leads to annuity plans outperforming other investing alternatives.


For example, when interest rates on most investment products are decreasing dramatically in today's market, the current rate of return on bank fixed deposits (FDs), the most popular investment instrument among Indians considering retirement, is very low by historical standards. The interest rate was 8.5% in 2014 and has reached a record low of 5.4% in 2021. Anyone who held an FD of INR 10 lakh with an interest rate of, say, INR 25,000 per quarter will now receive INR 18,000 per quarter, or possibly less if interest rates fall further in the future.


3. Annuity plans have no investment limits. This is in contrast to other schemes, like the Senior Citizens Savings Schemes, in which you may invest up to INR 15 lakh, and the Post Office Monthly Income Scheme, in which the maximum investment is INR 4.5 lakh.


4. You can count on a steady stream of income. An annuity plan may be the best option for someone looking to manage the longevity risk. Annuities guarantee a stable income at a rate of interest comparable to most other investment instruments. You might include annuity plans in your retirement portfolio since they provide security and a regular income flow.


Where Can I Purchase an Annuity Plan?


Numerous life insurance firms provide both immediate and deferred annuity plans. Customers can select one based on their particular needs and requirements. Various insurance firms provide immediate annuity plans, like HDFC Life Insurance, Max Life Insurance, Bajaj Allianz, Tata AIA, ICICI Prudential, PNB MetLife, Canara HSBC OBC, Kotak Life, and SBI Life. All of these plans are available in three variations: "Only Pension," "Pension for Life," and "Pension for Life with Return of Premium." You can select any of these options for yourself or a joint cover for you and your spouse.


There are several insurers and plans to select from in the deferred annuity plans category, including Bajaj Allianz, Max Life Insurance, ICICI Prudential, HDFC Life, Tata AIA, Canara HSBC OBC, and IndiaFirst.


Buy Online and Earn an Additional Pension


When purchasing products and services online, you can easily compare the same products from several companies and select one that best meets your needs and requirements. This reasoning also applies to annuity plans.


When you purchase annuity plans online, you have the option of evaluating the products based on a variety of criteria, and you may even make extra money. This is because when consumers invest in annuity plans online or purchase these plans online, they get an additional payout of more than 3% on the whole invested corpus.


For example, Harish Goel, age 60, plans to invest INR 75 lakh in an immediate annuity plan that provides a lifelong pension as well as the return of the whole corpus invested to the nominee. Harish purchased this plan online after he compared it with other plans, and he’ll get a monthly pension or income of INR 38,340, totaling INR 4,60,080 per year. If Harish had acquired the same plan offline through an insurance agent or bank, he would have gotten INR 37,090 per month as income/pension, for a total of INR 4,45,080 per year. Now, by investing the money online over a 40-year period, he’ll get an additional payout of INR 6 lakh above investing the money offline.

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