Want a pension-like income after retirement? Here’s how annuity plans work

For someone who has spent years building a retirement corpus, the question does not end with “How much have I saved?” The next one is often more difficult: how do I turn that money into a monthly income once the salary stops?

An annuity is one option. In simple terms, you give a lump sum to a life insurance company and, in return, receive regular payments. The payout could be monthly, quarterly, half-yearly or yearly, depending on the plan chosen.

This can be useful for retirees who want a predictable amount coming into their bank account. A person may, for instance, use an annuity to cover regular household expenses while keeping the rest of the retirement savings for emergencies, investments or larger expenses.

But annuities are not all the same. The first thing to look at is when the income begins. An immediate annuity starts paying out soon after the purchase, according to the terms of the policy. It is generally meant for someone who has already retired and wants an income stream without waiting.

A deferred annuity works differently. There is a gap between buying the plan and receiving the income. This can make it more suitable for someone who is still working but wants to arrange a future retirement income.

Then comes the question of what happens to the money after the annuitant dies. A life annuity can continue paying as long as the person is alive. A joint-life option can provide income to the spouse after the first annuitant’s death, subject to the terms of the policy.

Some plans also offer a return-of-purchase-price option. Here, the original amount used to buy the annuity is paid to the nominee after the annuitant’s death, as per the policy conditions. There is a catch, though. The regular income under such an option can be lower than what is offered by an option that does not return the purchase price.

This is where the decision becomes less straightforward. A higher monthly payout may look attractive, but it may come with fewer benefits for the family. On the other hand, choosing a return-of-purchase-price option can mean accepting a smaller regular income.

Liquidity is another issue. Once a large sum is used to buy an annuity, that money cannot generally be treated like a savings account that can be dipped into whenever

required. For retirees, this matters because medical bills, home repairs or other unexpected expenses can require a sizeable amount at short notice.

Inflation also needs to be factored in. A fixed income that feels comfortable at the beginning of retirement may not stretch as far after 10 or 15 years. The cost of everyday necessities tends to rise, while a fixed annuity payout may not rise at the same pace.

That is why putting the entire retirement corpus into an annuity may not be the best approach. Instead, retirees can first work out how much they need for essential expenses and use an annuity to cover a part of that requirement. The balance can remain in investments or other relatively liquid avenues.

The right annuity, therefore, is not necessarily the one offering the highest monthly payout. It is the one that fits the retiree’s expenses, liquidity needs, family requirements and expectations from retirement income.