The most important part of one’s life starts from the age of earning and ends with the retirement letter.
Though working for 60-70 years on loop, saving a lot down the line, putting up insurance policies will not suffice your fixed-income requirements when you want to enjoy peaceful life standards in your mid 70s-90s.
So what do you think can make your after retirement living standards equivalent to what they are at present ?
Precisely, using some present consumption money to buy future living standards with recurring fixed income and risk aversed life is the key to a safe retirement plan.
Let us explore how giving up some today can buy you a secure future!
What Is Annuity?
An annuity is a financial product that attracts the consumers to invest out a lumpsum or a periodic amount towards the policy.
The policy ensures them a fixed income stream starting from a specified future date to the end of life.
In simple words, that is if I purchase an annuity plan with a monthly amount till the age of 60 years, and the institution will provide me with a specified monthly income after I attain the age of 60 till my death.
The institution providing annuity will use my monthly or lump sum amount for investing in assets such as shares, bonds or any other profitable investments.
This will help them earn as well as create a pool of funds for my retirement income.
How Does An Annuity Works ?
Annuity contracts happen between the financial provider and the individual who is referred to as an “annuitant”.
Annuitants are the service takers who aim at stable and regular income after retirement.
However, the amount of installments or the lumpsum investment towards the annuity plan is illiquid till the time it matures.
One can take out money but is subjected to high cut offs.
The earlier an individual takes up annuity plans the more time they have to spread the installments and therefore reduce the burden on present consumption with a secure future.
Deciding on an annuity plan needs you to estimate the amount of income that you would prefer to have in future and will be able to use up.
After this estimation, you have to assess the plans that will ensure you the estimated level of future income depending upon how many years and how much present money you need to pay to purchase the policy.
The formula for annuity assessment is : PV = P X 1-(1+r)-n/r
However, the process seems easy but it is divided into two main phases :
Accumulation
The phase of investing is basically an accumulation of funds. Here you start paying out for annuity purchases till the time your paying periods end.
Any money invested in the annuity grows on a tax-deferred basis during this stage.
Annuitization
It is the phase where the actual payout to the annuitant starts.
Now the question arises that when and how the payments will proceed ?
The amount specifications and time is as per the contract to which an annuitant is entitled to.
Types Of Annuity
Annuities are categorised on two basis:
One is payment options and the second is the fixity of annuity
On the basis of Payment Options
Fixed Annuity
How about betting safe on investments and securing a normal risk-averse amount after retirement ?
The benefit of a fixed annuity is that you are sure that the contract will buy you fixed recurring income after retirement that too in fixed proportion pre-decided in the contract.
Fixed amount is to be paid at regular intervals for a certain period of time in a contract or in lump sum.
Suppose you pay out ₹ 4,00,000 in lump sum at the age of 40 years and buy a contract where you are entitled to monthly amount of ₹ 10,000 from the age of 70 years till your death.
The payout is certain and fixed.
Variable Annuity
Risk lovers with high gaining capacity like to invest in variable annuities.
Variable annuities mean investing all amount at once or periodic amount in contracts that might give high payouts or even can give low payouts depending on the portfolios of investments.
This payout depends upon market conditions and their plan’s investment returns.
This type of annuity plan does not ensure a fixed or stable retirement cash flow.
Hyothetically, if you take up a contract where you have to pay monthly installments of ₹ 1500 from the age of 45 years to the age of 60 years.
This will fetch you a retirement income but the magnitude of payouts depend upon the performance of the economy as well as invested market profitabilities.
Maybe sometimes you would get ₹ 2000 per month, or else another possibility is that you might even get ₹ 1000 per month.
Indexed Annuity
Indexed Annuity or Fixed Indexed Annuity offers features of both fixed as well as Variable annuity.
On investing the amount in lump sum or paying periodic income, this annuity credits interest based on the market index like Nifty Bank Index having a ceiling limit for the profits while maintaining a minimum interest rate to avoid potential loss.
Market Index measures the performance of similar companies in a market.Companies are grouped together on the basis of several factors like market cap or any industry etc.
Consider the scenario, as per the contract, the plan offers a minimum interest of 4% and maximum interest of 10% per year where an annual increase of 80% might be paid to an investor.
If the index is up at 12% in a year then as per the plan, investor will be offered 80% of the increased index value i.e. 9.6%
But if the increase is upto 20% then plan will only pay 10% as the maximum interest is set to 10% and can’t be raised beyond that.
And if the index goes down till 10% ina year, then the investor will atleast get 4% as the floor imit is set to this value.
On the basis of fixity of annuity
Immediate Annuity
In this type of contract, the annuitant is required to invest full amount in a lump sum.
Here, the payout starts immediately for a specified time or in most cases lifetime of the individual.
Hereby this eliminates the need for the accumulation phase of the process and direct annuitization picks up.
Suppose you pay out a lump sum amount of ₹ 2,00,000 on 1 April 2022 by your present age as 58 years under an immediate annuity plan that ensures monthly payment of ₹ 3000 until you are 93 years old.
Now after all the paperwork is done you are eligible for immediate effect payouts every month till you attain the age of 93.
Deferred Annuity
These plans work as pension or retirement savings. Deferred annuities involve installments purchase of contract till a time or the amount in lump sum.
After that, the annuitant gets the benefits of regular income in future, probably ahead of retirement age.
Suppose you aspire to get monthly ₹ 5000 after the age of 60 till the age of 90 for 30 years.
For this, you give out monthly installments of ₹ 1500 from the present date when you are at age 42 years.
You have to pay this monthly amount till the age of 60 years and then annuitization will take place.
How Does Annuity Benefits For A Retirement Plan ?
Annuity helps in purchasing your future consumption to remain on the same standard of living after retirement.
Retirement can be very burdensome with no source of fixed income streams where you are obliged to take the support of others.
Being independent after retirement is one such aim solved by the help of annuity plans.
You can plan your future goals and plans when you know what you would be earning.
Depending upon the capacity you can choose how to spend your leisure and work life in the present and in future.
Insurance VS Annuity
Since a lot of people are unaware of the fact that annuity and life insurance services are apart and way too different from each other often confuse between the two.
Insurance hedges against the risk of uncertainty and you get the compensation when the circumstances are realised.
Whereas an annuity is an amount that you purchase for future income and is independent of any circumstances to be realised.
Insurance demands policy premium throughout and if in any case something happens to the insured, the insurer pays out the agreed amount.
In the case of an annuity, as discussed above, the annuitant pays out some agreed sum and then is eligible for fixed regular payouts after retirement.
Advantages Of Annuity
Lifetime Income
Annuity enables you to enjoy recurring lifetime income in hand that makes you independent and secure.
Hedges Against Inflation
An annuity plan can protect you against inflation by contradicting the consistent rise in prices with the sum assured that is accrued in the due course of time.
Tax Saving
Most of the time annuities being a retirement purpose instrument is aversed from tax payments and therefore can save your pocket from tax hole.
Disadvantages Of Annuity
Illiquid
Annuity plans are not so liquid and your money, once it is very hard to withdraw as charges deducted, are high.
Low Rate Of Returns
Being a less risky investment and more inclined towards safe play, the returns from annuity investments are generally low as compared to that of other instruments.
High Cost
Generally the annuity plans require a high cost of the process and are therefore regarded as a costly instrument to purchase.
Top 5 Annuity Service Providers In India
Aditya Birla Sunlife Immediate Annuity Plan
The plan requires a one-time payment of premium and thereafter the annuitant gets 6 choices to avail the payout services after retirement. This is a fixed income plan with tax benefits prospects. The minimum age to enter this plan is 45 years and the maximum can go up to 90 years. The plan ranges from the amount of ₹ 1,50,000 with no maximum limit.
Aviva Annuity Plus Plan
It is a single premium plan that ensures regular income after the retirement of the individual. The minimum age to apply is 18 years whereas the maximum can go up to 80 years. The annuities are paid after the premium payment and have 7 choices to avail the layouts. The minimum premium amounts start from ₹ 25,000 with no maximum limit.
Exide Life New Immediate Annuity Plan
This plan is a single purchase plan with immediate payouts. The plan ensures regular income for life long and gives 7 options to avail. The plan is open for all annuitants from the age of 45 years to the age of 80 years. The annuitant is subjected to a minimum premium of ₹ 1,000 per month that has no upper limit.
Future Generali Immediate Annuity Plan
The plan is a single premium and immediate income plan. The annuitant gets the payout for a full life and does have 2 payout options to choose from. The minimum amount to enter the plan is ₹ 30,000 and there is no maximum limit. Age ranges from 40 years to 80 years. The plan supports tax benefits.
HDFC Life New Immediate Annuity Plan
A single purchase plan provides for life long income. The income stream starts immediately. There are major two options for purchase that is single life annuity and joint-life annuity plans. The minimum age to enter is 30 years whereas the maximum age is 85 years. The plan is subject to tax benefits.
Bottom Line
Summing up the annuity as a gift for retirement, we now know how annuities can be a future safe option with regards to retirement plans.
Now you know how to invest in better handled fixed income options and enjoy financial freedom with lesser risk as a pension gift.
Easy and secure retirement with covered monetary freedom lets you live your life in your way and on your own terms.
