Annuity vs Lump Sum: Which Should You Choose?

Written by : Knowledge Centre Team

2022-09-29

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Retirement is one of those financial goals you must start planning for at an early age. The need for adequate savings and effective financial planning of living and expenses post-retirement cannot be emphasized enough. This is because post-retirement you would not want active employment for income.

Thus, you must start using retirement plans to secure yourself financially. These plans can provide you with both annuities as well as lump sum benefits.

One of the questions you can consider for your retirement planning is about receiving retirement benefits in lump sum vs annuity mode. Ideally, upon retiring you will need both kinds of financial assistance. However, planning helps you save a lot of hassle and money in taxes and otherwise.

What is Retirement Annuity?

A retirement annuity is a retirement plan that provides a steady stream of income. The annuity can continue for a limited period or lifetime as per your choice. In this plan, you can avail of a fixed or growing monthly or annual income. You can fund the annuity with regular or lump sum investments in the plan.

You can enjoy the flexibility to choose from a wide range of pay-out options to meet your specific retirement needs.

Following are the advantages of a retirement annuity plan:

There will be a guaranteed flow of income throughout the retiree’s life
This plan can also provide a lifetime income for the dependents
It comes with lifetime income benefits
One gets a choice of investment options

Types of Annuities in India

Now that we know what retirement annuity plans are, let’s look at some popular annuity plans and their features:

Deferred Annuity

A deferred annuity is a long-term annuity plan where you can invest and grow funds before starting an annuity. In this annuity plan, you can invest in a lump sum or invest a regular amount for a few years. There is always a buffer between starting your investment in the plan and the start of the annuity. The age when your annuity will start from the plan is called as vesting age in the plan.

Immediate Annuity

In this type of annuity plan, the pension becomes payable immediately after your investment. The premium is paid in a lump sum at the start of the annuity plan.

Must Read - Benefits of Buying the Best Annuity Plan for Retirement

With Cover Pension

This annuity plan is a good option when the spouse is financially dependent on the retiree. There is also an insurance cover in this plan that provides a lump sum amount to the spouse after your demise.

Without Cover Pension

In this annuity plan, there is no life cover. The plan pays out the remaining corpus in case of your demise. You can invest in this annuity plan jointly with your spouse. This will allow your spouse to receive a pension after you without the hassles of reinvesting the money.

Unit Linked Pension Plan

A small part of your funds in the unit-linked annuity plan is allocated to equity. This allows higher corpus growth over the long retirement period which can extend to more than two decades.

Must Read - Defined Benefit Pension Plan

Lump Sum Payments at Retirement

A lump sum payment is a one-time settlement that is made by your employer or a retirement plan. In this plan, the retiree will get a large sum of money only once that can be used to fulfil retirement needs.

Advantages of lump sum benefits received at retirement:

Good for various post-retirement dreams and plans
Your dependents will receive the money even after your early demise
A lump sum amount can help in small and big adjustments after retirement, such as moving cities
It can be utilised for children’s education or marriage or to pay off any ongoing loans

Lump Sum vs Annuity for Retirement

Here’s a summary of the factors and benefits of annuity and lump sum payments at retirement:

Lump Sum	Annuity for Retirement
Single large payment	Secures regular cash flow
Helps pay off debt, look after remaining financial goals, buy, build or move a house	Helps look after health, kitchen and lifestyle expenses
Planning is important to receive tax-free amounts. Otherwise, the amount may be affected by the tax.	Regular pension is treated as salary and taxed at slab rates, except for payments received from PPF, ULIP or deferred annuity plans from life insurance companies
Examples include Maturity benefits from NPS, PPF and similar long-term investments. Gratuity and leave salary for employed retirees	Examples include: Regular income pay-outs from EPS, ULIPs, PPF (partial withdrawals), or life insurance pension plans

Also Read - How to Invest in National Pension System?

Should you Choose Lump Sum or Annuity at Retirement?

The selection of an annuity or lump sum retirement plan primarily depends on your goals for your retirement and the need for a regular income. Ideally, you need to have both.

While a regular lifetime pension is a must, the lump sum amount will help you settle any remaining financial goals or loans. Thus, you can easily create a pitch for a peaceful retirement during your early years in retired life. However, you need to plan for both payments while you are still employed.

As a financial goal, you can assume to receive up to 25% of your total retirement kitty in a lump sum. For example, if you plan to have a retirement fund of Rs 5 crores at the age of 60, you may want to pull Rs 1 crore aside in a lump sum while you invest the rest for an annuity.

The annuity payments will keep you financially independent and help you in meeting your everyday expenses.

You must contribute 10 -15% of your annual income to a retirement plan from the day you start earning. Once you reach retirement age and your regular income stops, you will start getting a steady income from the retirement plan you have been contributing to. That is how retirement plans work.

Every retirement plan has its features to provide either a lump sum or annuity payments after maturity. Plans like Invest 4G ULIP from Canara HSBC Life Insurance, which allows you to invest up to the age of 99, can help you build a large corpus during your employed years. At retirement, you can start drawing a tax-free pension from the same plan, that can continue until your demise.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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