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3 Things to Check Before Buying a Deferred Annuity Plan

Retirement is the best time to relax and explore the world. But, it has to be made comfortable physically, emotionally, and financially. Financial stability is the most important of it all! Retirement annuity plans are designed to facilitate regular income until death. It will serve as a consistent financial resource.
 

What is a Deferred Annuity Plan?


A deferred annuity plan is a retirement plan for your future financial needs. The retirement plan consists of the accumulation phase and the vesting phase. During the accumulation phase, you have to pay the premium regularly during the policy term to accumulate the retirement corpus. At the end of the accumulation phase, you can withdraw one-third of the retirement corpus at the end of the accumulation phase and invest the rest to purchase an annuity plan. The annuity plan will provide a regular income post-retirement.
 

There are different types of annuity plans. The immediate annuity plan and the deferred annuity plans are the most important. The immediate annuity plan will start providing the regular income immediately after purchasing the annuity plan. And it will provide the regular income starting from a deferred date. So, there are a few aspects that you need to consider while purchasing deferred annuity plans.
 

Things to Check Before Purchasing an Annuity Plan
 


Purchasing an annuity policy is driven by the sole objective of satisfying your financial needs from a later date. Therefore, you have to choose the product features wisely to maximise the benefits. Consider these aspects for a better understanding:
 

  1. Inflation Rate - The inflation rate is an important factor in making a financial plan for the future. It will help you balance your financial needs with the increasing costs. At present, you are getting comfortable with the increasing cost of products because there is an increase in your salary income. However, after your retirement, your income from the deferred annuity plan will be consistent and not increase with the increasing costs. Therefore, you need to be cautious about the income from your deferred annuity plan.

    Firstly, you have to make a list of your current monthly expenditure. It should include your grocery, medical and other expenses. Secondly, you should consider the inflation rate, for example, 6%, and calculate the corresponding expenditure that will start from a future date. It will help you accommodate the expenses without financial stress after retirement. Therefore, derive the regular income you need after retirement and decide on the deferred annuity plan based on that. However, if you feel your expenses are increasing based on certain lifestyle changes, you can always increase the annuity plan's benefits.

    For instance, with this, you can decide on the immediate or deferred annuity plan, try to save it with a lump-sum premium payment, and increase the benefits with the top-up option later.

  2. Deferred annuity taxation* - Paying income tax* is a moral obligation. You have to fulfil it at every stage in your life, including the retirement phase. Income tax* is based on your annual income considering the exemptions and deductions at the applicable tax* rate. You will get a tax* deduction benefit of up to ₹1,50,000 from the taxable income for the investments made in pension and annuity plans. However, the payouts do not qualify for a tax* exemption completely.

    One-third of the retirement corpus is withdrawable and tax*-free, while the remaining fund invested in the deferred annuity plan for the regular income is taxable. Therefore, while deciding on the deferred annuity plan, you need to consider the extent of tax* liability. It should not compromise the benefits you expect from your retirement plans.

  3. Internal Rate of Return(IRR) - The internal rate of return is an important factor while investing. It is the expected compound annual rate of return from the investment. While calculating the IRR, the initial investment will be equal to the present value of the future cash flow. It helps you derive the effective interest rate earned by assuming the initial payout or the return from the investment in the future equals the investment of cash today.

    Considering this time value of money is important while investing in the deferred annuity plan for adequate returns. It will help you accommodate the expenses at a future date with the necessary plan today.
     
Conclusion


Annuity plans provide a steady income for your retirement expenses. Therefore, you have to take sufficient care while investing in annuity plans. And, deferred annuity plans require special attention because they serve the financial needs later in life. Therefore, you need to focus on the internal rate of return, inflation, and tax* liability to ensure you receive adequate payouts after your retirement.


Moreover, it is important to accommodate the family expenses appropriately if your family is dependent on your earnings for their survival. Therefore, make an informed decision, choose the products wisely, and ascertain a secure financial future with deferred annuity plans in India.
 

L&C/Advt/2022/Nov/2701

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.