Planning for your golden years is extremely important. If not done well, it can leave you in financial worry about your expenses. During retirement, income sources are either non-existent or limited, and hence, having a strong retirement plan is essential. Retirement planning involves developing a substantial corpus that helps tackle medical exigencies that come with increasing age and routine expenses.
According to the India report of HDFC: The Future of Retirement Shifting Sands, 72% of the working population is concerned about the growing economic uncertainty regarding their ability to save for retirement[1]. Further, 17% of the working strata believe that they will no longer be financially comfortable when they retire [1].
These concerning numbers present the need for a robust financial plan that accounts for an individual to have a regular income. Among the various investment products that can help in retirement planning, an annuity plan comes in handy. An annuity plan provides regular income even when you retire. These annuities, in today’s day and age, are gaining popularity since they offer a guaranteed income for individuals who want to ensure there is a consistent and guaranteed source of income, even during retirement.
An annuity is a contract between the insurance company and the policyholder where a lumpsum amount or regular payments are made to keep the policy coverage active. These annuities offer regular payments during your retirement.
Annuities are two types — immediate annuity and deferred annuity plan — that are smart options for retirement planning. Here are what they mean and the differences between the two.
Immediate annuity
An immediate annuity plan starts paying the policyholder immediately after investing. When you invest in an immediate annuity plan, there is a mandatory waiting period of 12 months after which payments are made by the insurance company periodically. The frequency of the payment is based on the terms that are opted for at the time of the policy purchase. Since an immediate annuity starts to offer periodic payouts in a short period (12 months), it is an ideal investment for those individuals that are nearing retirement or need money after a short time frame.
Deferred annuity
A deferred annuity, unlike an immediate annuity, makes periodic payments for a specified duration. Here, the policyholder can decide when they want the payments from their annuity plan according to their investments that are maturing in their retirement planning process. Deferred annuities are best for people that have invested in an annuity cover early in their life and expect to receive annuities after a long time.
Difference between immediate and deferred annuity
| Deferred Annuity | Immediate Annuity |
| The deferred annuity plan pays a fixed amount to the policyholder over a specified period, which is generally, the term of the policy. | An immediate annuity plan pays the policyholder a specified amount immediately after investment after the completion of the mandatory lock-in period. |
| Almost two-thirds of the amount of the premiums in a deferred annuity plan are invested whereas the balance can be withdrawn before retirement. | Any payment to an immediate annuity plan is used immediately by the insurance company to purchase annuities that are then paid to the policyholder after the mandatory 12-month waiting period. |
| The process of accumulation and providing funds for retirement takes a considerable time. | An immediate annuity is suitable for those individuals that have a short investment timeframe and need money in the near future. |
| The deferred annuities can be more affordable as the charges are spread over a long period of investment. | In some cases, an immediate annuity can be more expensive since the one-time lumpsum payment has to be made. |
Are there any tax benefits for annuity plans?
Yes, the amount invested in annuity plans is exempt from tax under Section 80C of the Income Tax Act. 25-33% of these investments can be withdrawn in one go without the payment of any tax. However, any income generated on these annuities is subject to tax as per applicable tax laws.
Further, for senior citizens, there are no tax implications for the income generated if the total income is below the threshold level. But, in the case of senior citizens with taxable income, advance tax provisions are applicable.
These are some differences and features you need to know when planning for your retirement. To decide which policy to choose among the myriad alternatives, you can make use of a retirement calculator. This retirement calculator not only compares the premium of the policy, but also its benefits and features.
