Is Annuity Right Option for Retirement?

Written by : Knowledge Centre Team

2021-12-07

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Retirement is one of the most important life goals you want to achieve. You work hard and earn to make sure you can live stress-free after you retire.

The major thing that makes your life different post your retirement is that now you no longer receive a salary. Income stops after retirement. On the other hand, the expenses continue and even rise with inflation. Meeting these expenses can become a challenge.

Saving and investing money is thus important to create a large retirement corpus for yourself so that you can meet the regular expenses without the fear of outliving your money.

Having a regular stream of money thus becomes important to live after your retirement and cater to your expenses.

What is an Annuity Plan?

An annuity is a type of financial and legal arrangement in which the provider agrees to pay you a regular sum from your lump sum money.

In an annuity plan, you have to invest a certain sum regularly or in a lump sum. From the amount that you have saved, a regular income stream is created after maturity. An annuity can be created either for a specific number of years or even for a whole life.

Moreover, an annuity plan can also supplement your existing pension plan that is supported by the government.

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Five Benefits of Buying the Best Annuity Plan for Retirement

An Annuity has the following benefits which make it a good investment for retirement. These are:

1. Safety of Investment

An annuity is one of the safest investment instruments. Annuity returns are not exposed to the market risks. The money you invest i.e., the principal remains safe throughout the term, your returns will not get lower than the principal.

The income payouts that you are eligible to receive are guaranteed. This provides a sense of financial security.

2. Lifetime Income

The biggest fear you may have after you retire is the fear of outliving your savings. With an Annuity plan, you do not have to worry about this. Most of the annuity plans, provide you with a regular income for your lifetime.

Having an income throughout your life after retirement also gives you a sense of financial freedom as you don’t have to financially depend on anyone else.

3. Provides Regular Income

The main objective purpose of an annuity is to provide you with a regular stream of money. This can act as your income after retirement.

This income can help you fulfil the following

a) Daily essentials such as kitchen expenses, water, electricity bill
b) Medical expenses
c) Set aside money for emergencies
d) Family obligations

Also, Annuity plans provide you with an option to choose the regularity of the payouts you will receive. These can be

Monthly
Quarterly
Yearly

4. No Limit on Investment

You can invest as much as you want in your Annuity plan. This benefit of Annuity plans sets it apart from other retirement investments people take for assisting them.

Plans such as Senior Citizen Savings Scheme and Post-office schemes have a certain limit till which you can invest. On the other hand, Annuity plans have no limit on investment.

5. Helps in Tax Savings

Annuity comes with several tax benefits as well. Annuity plans are eligible for tax deductions under section 80C and 10(10)D.

You can claim a deduction of up to Rs 1.5 lakh on the investment that you make to your immediate annuity plan u/s 80C of the Income Tax Act.

Also, no tax is charged on your Deferred Annuities till the time you are investing. Tax will be applicable only when you start to withdraw. This makes your investment, Tax-deferred.

Types of Annuity Plans

The different types of Annuities that you can take are as follows

On the basis of duration

a. Immediate Annuity
b. Deferred Annuity

On the basis of returns

a. Fixed Annuity
b. Variable Annuity

Immediate Annuity

As the word suggests, this type of annuity starts immediately after you make your lump sum Investment.

The premium is paid in a lump sum and then converted into a regular income stream for you. Premiums paid towards Immediate Annuity are tax exempt.

Deferred Annuity

In this type of Annuity, you accumulate funds over a period of time and the payments will start at a later date chosen by you. You can pay either regularly or in a lump sum.

The minimum period you have to wait after the policy term gets over is 1 year. After a year you can choose to receive payments. This is a tax-deferred investment. Tax is only charged once you start to withdraw.

For example, you have purchased a Deferred annuity plan and invested in it for 10 years. Now you want your payments to be started after 2 years. At the end of the 12th year, you will start receiving income.

Fixed Annuity

In Fixed Annuities, you received stable payouts at a specific rate throughout your term. That is, the payout remains constant throughout the payment period. This ensures that the income remains steady as the resources are put into fixed income instruments.

Fixed Annuity thus provides you with

Fixed Returns
Predictable Income

For example, you have a corpus of Rs 10 Lakh, and the rate is 8%. No, you will get a return of 8%, even if the rate in the market changes.

Variable Annuity

In this type, the returns do not remain fixed. Here your funds are invested in the market. Since the resources here are exposed to the market risks, their return keeps on changing. If the portfolio in which your amount is invested performs well, you can get higher returns.

Unlike fixed annuities, returns of variable annuities are not stable and predictable.

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Annuity Retirement Plan is a Need

Annuity is not just a good investment option for retirement, it is a need. After you retire from active duties of your profession you need annuities to provide a regular income.

Thus, you have multiple annuity options you can use during your retirement. The primary role of an annuity is to provide a regular income in your golden years. A major part of this income has to be stable and invested safely for long-term stability.

However, if you have surplus money to invest, you can have windfall income from variable annuities as well.

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