For many Indians approaching retirement, the biggest worry isn’t about building wealth — it’s about making sure that wealth lasts. This is where annuity plans come into play. Offered mainly by insurance companies, annuities are designed to give you a guaranteed income stream, often for life, in exchange for a lump- sum investment.
How annuity plans work
Imagine an annuity as flipping your money into a pension plan. You pay a large sum to an insurance company, and they pay a set sum at a set frequency – monthly, quarterly, or annually – until your annuity runs low, usually when you die. It depends on how much you pay, what kind of annuity it is, your current age, and current interest rates.
Different types of annuities
It's anything but a one-size-fits-all situation. Some policies pay as soon as they are issued, also called immediate annuities, and some pay after a few years, also known as deferred annuities. There are also fixed annuities, where payments remain fixed, and variable annuities, where payments are subject to change based on returns. The "annuity for life" option, where payments are made until the policy buyer's death, is by far the most popular choice for Indians.
Why retirees consider them
The largest benefit is peace of mind. Annuities don't rise and fall like stock prices, unlike market-linked products. For retirees, it means a stable income to pay for staples like groceries, healthcare, and bills. With a world of increasing healthcare bills and unreliable family benefits, predictability is a highly prized commodity.
The catch you need to know
Though annuities also hold out the promise of predictability, they fall short of being perfect. Income is moderate — between 5 percent and 7 percent per year, depending on your plan—and after you invest your lump sum, your money is usually gone for good. That's why it’s important to invest a percentage of your money, but keep enough for emergencies, since annuities are illiquid.
Tax implications
These annuity payments are considered income and taxed as your slab. Therefore, even if regular income guarantee sounds appealing, it's not quite tax- free income. That is why it's necessary to coordinate your entire retirement portfolio so annuities supplement, rather than substitute, other tax-effective funds like PPF, EPF, or NPS.
The bottom line
High returns are not what annuity plans are about. They're about guaranteeing your retirement years ahead of a regular monthly income like a pay-cheque. For those who value certainty more than flexibility, annuities are a key element of a successful retiree strategy.
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