Ever given a thought to getting a fixed income after retirement, same as a salary? That is exactly what annuity offers. In simple terms, it is just a contract where you invest a lump sum amount or make payment in instalments and in return you avail regular payments later – generally during retirement.
In case you are planning out long-term financial security, then being aware of annuities is a great place to start with. Particularly in India, where conventional pension schemes are fading away, annuities are becoming highly relevant. Let’s read on and understand annuity meaning, how it functions and how you can use an online annuity calculator smartly.
Major key pointers you must understand about annuities
- Annuity meaning
Annuity is nothing but a financial agreement. Here, you invest a specific sum of funds with an insurance company and in return, they pay you a fixed income at periodic intervals i.e., monthly, quarterly or yearly – after a specific period.
It serves as a self-created pension, especially useful after post-retirement. You can pay the amount either as a one-time lump sum or in parts or instalments. Once the annuity starts, you get a steady income for a fixed period or lifetime based on the plan you zero in on.
- Types of annuities
There are majorly two kinds of annuities:
• Immediate annuity: You invest a lump sum and begin getting payments right after (generally in a month). This is ideal for retirees requiring income instantly.
• Deferred annuity: You invest now; however the payout starts post few years. This assist in building a future income stream and is well-suited for those in their 40s or 50s and planning out for a happy and stress-free post-retirement life.
- Who offers annuity plans
Annuities are well regulated by the Insurance Regulatory and Development Authority of India (IRDAI) and sold by insurers such as HDFC Life. Such insurers offer well prepared plans tailored for senior citizens, NRIs and early retirees.
- Best for retirement planning
Since traditional pensions are rare for private-sector employees, annuities fill this gap. They provide a guaranteed income for life or a fixed term after retirement.
If you are in your 50s or 60s, investing in annuity plans ensures you do not rely on children or savings alone. It helps maintain financial independence post-retirement.
- Returns may not be high, but safe
Annuities generally offer 5% to 7% annual returns, which may be lower than mutual funds or equity returns. But unlike market-linked instruments, annuities are risk-free.
The returns are locked in and paid regularly, making them ideal for those who want stability over high gains.
- Taxation on annuity income
While the premium used to purchase the annuity (if part of pension plans) is eligible for tax deduction under Section 80C (within ₹1.5 lakh limit under 80C), the payouts are taxable as regular income. So, if you’re in a higher tax bracket, annuity income may be taxed accordingly.
- Payout options available
You can select how you want to receive your annuity
- Monthly (best for daily expenses)
- Quarterly
- Half-yearly
- Annually
Choose the frequency that suits your lifestyle. Monthly is the most common for retirees who rely on it like a salary.
- Use of annuity calculator
An annuity calculator lets you estimate your income based on investment amount, annuity type, age, and payout frequency. It is available on insurance websites. It helps compare different plans and ensures you are choosing the right investment amount to meet your post-retirement needs.
- Joint life option available
Most annuity plans offer joint life annuities, where payouts continue even after the death of the primary annuitant. For example, if a husband opts for joint annuity, after his death, the wife will keep receiving the same (or reduced) amount for her lifetime. This ensures financial safety for spouses.
- Pension plans are linked with annuities
If you invest in government-backed schemes like the National Pension System (NPS), at least 40% of your retirement corpus must be used to buy an annuity plan at retirement. This ensures retirees have a guaranteed income and do not exhaust their funds too quickly.
- You can choose return of purchase price option
Some annuity plans offer the Return of Purchase Price (ROPP) option. Here, after the death of the annuitant, the invested amount (purchase price) is returned to the nominee.
Though the monthly payouts are slightly lower, it ensures your original capital is not lost and benefits your family.
- Not very liquid investment
Annuities are not flexible like mutual funds or savings accounts. Once you invest, you generally cannot withdraw your money prematurely (except in some rare cases).
So, it is not suitable for short-term goals or emergency funds. Consider this only if your basic liquidity needs are already met.
- Compare before investing
Always compare annuity plans offered by different insurers. Use tools like the annuity calculator to check:
- Expected monthly/annual payouts
- Whether they offer ROPP
- Joint or single life
- Minimum investment required
Striking a comparative analysis helps you in choosing the most value-packed plan with the correct balance of returns and features.
- Best suited for risk-averse investors
Annuities are tailored for people who tend to avoid risks – such as senior citizens, retirees or those with zero family support. It does not fluctuate with the market changes and provides predictable cash flow. This makes it perfect for conservative retail investors looking for stability and mental peace in their old age.
Ending note
To sum it up, an annuity is like your self-made pension. It offers assurance of periodic income after retirement in exchange for a one-time or a phased investment. While the returns are usually moderate, the safety and guarantee of fixed income make it an excellent choice for senior citizens and risk-averse investors.
Never ever forget to use an online annuity calculator before making an investment – it assists you in getting a clear picture of future payouts. In today’s uncertain era, having a dependable income in your golden years is not just smart – it is a must.
Make your retirement peaceful. Let your money work for you, even when you stop working.