Are annuity plans essential for retirement planning? Check types and other details

Retirement from a job or occupation is inevitable, and with it comes the end of a regular source of income. Yet, expenses don’t retire. In fact, they often rise, especially with inflation and healthcare costs. For someone who has been the financial backbone of their family, this transition can be daunting if you have not planned your post-retirement life. Combine this with average life expectancy, which has risen over the years in our country and has crossed 70 years, owing to better healthcare and living standards. Together, they bring with them an often less discussed but big challenge: the risk of living too long, especially after retirement without adequate financial support for those years.

How do we mitigate this financial risk of outliving our savings?

According to Ashok Manwani, Vice President – Products, Go Digit Life Insurance, the answer lies in early and strategic planning. 

“One must seek stable and secure income avenues. This is where annuity plans offered by life insurance companies come into play. These plans ensure a regular stream of income for life, helping you maintain your lifestyle and independence long after your working years are over,” Manwani said. 

What is an annuity plan?

An annuity plan is an agreement between an annuitant (the one who receives the regular annuity payouts) and an insurance company, where the former makes payment to the latter in a series of instalments or lump sum. In exchange for this, he or she receives regular disbursements of income either immediately or after completing a specific tenure as per the plan chosen.

Why are annuities crucial for retirement?

1. Steady Income Stream: They ensure you get a regular and predictable stream of income even after retirement, thereby helping you to be financially independent and maintaining your standard of living with complete peace of mind in your golden years.

2. Longevity Protection: The extended human lifespan creates a genuine possibility for people to outlive their retirement funds. Lifetime annuity plans ensure income continues for as long as you live, offering peace of mind.

3. Customisable Options: Annuities come with various features, such as increasing annuity for inflation protection, joint life annuity option to ensure continuance of annuity payouts to spouse or other family member even after you, and many other options like return of purchase price, etc., thereby allowing you to tailor the plan to your specific needs.

4. Tax Benefits: The premium contributions to the annuity plans are subject to tax benefits as per prevailing tax laws. In case of deferred annuity plans, there is tax deferred growth on earnings, which means you will only need to pay applicable taxes when you begin receiving payments.

Types of Annuity Plans

There are several types of annuity plans available in India, each catering to different financial goals and retirement needs:

Immediate and Deferred Annuity Plans help you get regular income—whether you’re retiring soon or planning for the future.

1. Immediate Annuity: The annuitant must pay a lump sum amount, and the plan starts offering regular income payouts from next month or next quarter or next year or after six months depending upon the annuity payout frequency you choose. If you are already retired or about to retire shortly, you can choose this type of annuity.

2. Deferred Annuity: Under this option, the annuitant chooses to start receiving annuity at a future date of his or her choice and for that invests a lumpsum amount of money till that period or contributes regularly during this set period called accumulation or deferment period. This type of annuity is good for those who are relatively younger in age, are still working and want to save for retirement at a later age.

The key difference between fixed, variable and Index-Linked Annuities lies in your risk appetite:

3. Fixed Annuity: This type of annuity offers a guaranteed or fixed rate of return and is not affected by any market fluctuation, thus providing predictable and consistent income for life. They are suitable for risk averse individuals who look for a guaranteed and stable income for peaceful retirement.

4. Variable Annuity: Under this type of annuity, your premium contributions are invested in market-linked assets such as stocks or mutual funds and offer the potential for higher returns, linked to the performance of underlying investments. However, they carry more risk as the payout can fluctuate based on market conditions. This type of annuity is suitable for those who look for higher returns and are ready to take the risk for the same.

5. Index-Linked Annuity: Here, the returns are linked to a specific market index, like the Nifty50, but they often come with a guaranteed minimum return. So, this means they provide a balance between fixed and variable annuity by providing some level of guarantees while allowing participation in potential gains of equity market. This type of annuity is ideal for individuals looking for a balance between risk and potential returns.

Comparing Annuity Plans: Which One is Right for You? 

“Your post-retirement lifestyle will benefit substantially when you investigate annuity options before retirement regardless of your employment status. Before selecting an annuity plan you should evaluate your financial targets together with your tolerance for risk and your planned retirement duration. A financial advisor will assist you in picking the most suitable plan which matches your requirements,” Manwani concluded.