Everyone wants to enjoy the retirement phase by following new hobbies, pursuing dreams, traveling, and spending more time with their families and friends. By investing in the right annuity plan, you can ensure a comfortable and worry-free retirement

Annuity plans are created with the sole purpose of fulfilling this objective.

What is an Annuity Plan?

An annuity plan is a financial product that provides a regular income stream in exchange for a lump sum investment. Essentially, you pay a certain amount upfront or over a period, and in return, the insurance company pays you a regular income for a specified period of life. Annuity plans are designed to protect you from outliving your savings by providing a steady income during your retirement years.

Annuity or pension plans can be bought at any time in your life. Some people choose to buy it when they are close to their retirement age, while some people prefer it during their mid-career who wish to secure their assets that too in their early 20s and 30s.

How an Annuity Plan Works? 

Let's Understand this with an example: Ravi is a 45-year-old professional, who wants to secure a regular income after he retires. To achieve this, he decided to invest ₹20 lakh in an annuity plan, contributing ₹2 lakh annually for 10 years. This plan will accumulate returns on his investment over the next 15 years, providing him with a steady income stream once he retires at 60.

Also Read: Difference between Sum Insured and Sum Assured

Different ways in which Annuity Plan Works

Life Annuity

You will get regular monthly/ yearly/ quarterly annuity payouts until your demise.

Life Annuity with return of purchase price

You will keep on getting annuity payments till your demise. Post demise, the insurer will return the initial amount, which was used to purchase the annuity, to your nominee. It is a good option for those who want to leave a legacy behind.

Annuity payable for a guaranteed period

The annuity is to be paid for a guaranteed period, say 5, 10, or 15 years even if the annuity buyer dies. Annuity stops either on the death of the annuitant or completion of the guaranteed period, whichever is later.

Also Read: 4 Benefits of Term Life Insurance

Types of Annuity Plans

1. Deferred annuity plans

These plans essentially help people to save for the future where they let you invest regularly to first build a corpus and once you retire you get a pension from this amount.

For instance, you invested in the National Pension System (NPS), and pension plans offered by insurers come in this annuity type as they first help you build a retirement corpus and then annuities a part of that corpus.

2. Immediate Annuity Plans

This type of plan suits best those who are willing to invest at a later stage of life, near their retired life. With an immediate annuity, you can give a lump sum amount to the insurer, and in exchange, the company starts making your monthly payment. If you are nearing your retirement stage and have a corpus ready, then you can buy an annuity plan immediately. They differ from deferred annuities as they do not have an accumulation period.

For example, Ramesh and Sangeeta are a retired couple from Mumbai who after years of hard work, choose to secure their financial future by investing a portion of their savings in an immediate annuity plan. Just before retiring, they invested a lump sum of ₹30 lakh to an insurance company. In return, they now receive a steady monthly income of ₹25,000 from the insurance company, ensuring peace of mind and financial stability throughout their retirement.

3. Fixed Annuity

In this plan, one gets the guaranteed amount throughout the tenure of the policy. This amount is decided at the time of policy buying. The amount paid to you is guaranteed. It is not affected by market fluctuations.

4. Variable Annuity

In a variable annuity plan, your premiums are invested in instruments, such as mutual funds or equities. Payouts from such plans depend on the performance of the fund your money is invested. If the fund performs well, you will get greater returns and vice versa.

Key Features of Annuity Plan

  • Safe investment Plan

Annuity Plans fall under the category of low risk investment being not a market linked plan. The amount one is getting in Annuity Plans is guaranteed and is fixed at the time of buying a plan only.

  • Financially Safe

Annuity Plans offer you with an income for life. Helps you in staying financially independent during your retirement.

  • Flexibility

These plans offer you the flexibility to decide how you want to receive your income. You can choose to receive the income either monthly, quarterly, half-yearly, or yearly. Some annuity plans also offer you the flexibility to pay your premiums monthly, half-yearly, yearly, or all at once as per your convenience.

Bottom Line

By understanding and investing in the right annuity plan, you can ensure a comfortable and worry-free retirement. Whether you are nearing retirement or just starting your career, it’s never too early or too late to consider an annuity plan as part of your financial strategy.

FAQs

What are the different types of annuity plans?

  • Immediate Annuity: Payments begin almost immediately after the initial investment.
  • Deferred Annuity: Payments begin at a future date, allowing the investment to grow tax-deferred.
  • Fixed Annuity: Provides regular, guaranteed payments.
  • Variable Annuity: Payments vary based on the performance of the underlying investments.

What are the benefits of an annuity plan?

  • Guaranteed Income: Provides a reliable income stream during retirement.
  • Tax-Deferred Growth: Investment grows tax-deferred until withdrawals begin.
  • Flexibility: Various payout options to suit individual needs.
  • Death Benefits: Some plans offer death benefits to beneficiaries.

Can I make withdrawals from my annuity before the payout period?

Yes, but early withdrawals can incur penalties and surrender charges, and the earnings portion of the withdrawal is subject to taxes. Withdrawals before age 59½ may also be subject to a 10% federal tax penalty.

Can I convert my annuity into a lump sum payment?

Some annuities allow for lump-sum withdrawals, but this may come with penalties and tax implications. It's essential to check the terms of your specific annuity contract.

How does the annuity plan calculator work?

The calculator uses your inputs, such as the initial investment amount, the expected rate of return, the frequency of payments, and the duration of the annuity, to estimate the periodic payments you will receive.

What are the key features of LIC's annuity plans?

  • Guaranteed regular payments
  • Options for immediate or deferred annuities
  • Choice of payment frequency (monthly, quarterly, half-yearly, annually)
  • Various annuity options such as single life, joint life, and return of purchase price