Planning for your retirement is often hazy and confusing, and it is delayed for various reasons. One of the major challenges while planning for retirement is a lack of clarity on the level of liquidity that will be required at the time of retirement. This is because we don't know what the world will look like 10 years from today, leave alone retirement. Nevertheless, it is an investment one should add to their portfolio.
While various options help retain a steady flow of income post-retirement, all these options come with various pros and cons. The path to retirement is not straight, and it takes effort to build a retirement corpus. The twists and turns in life bring about various life changes and events. These events might need special requirements of liquidity or an unforeseen situation. Annuity plans are a savior in the later stages of life, and depending on individual needs, one should evaluate an annuity plan before adding one to his/her portfolio.
Understanding Annuity Plans
An annuity plan is a financial contract between the insurer and the buyer where the buyer of the annuity pension plan pays to the insurer and, in return, expects a return on these investments. The returns usually begin, post a tenure, and keep coming in throughout an individual’s life. The insurer who creates these financial products invests the premiums/amount collected from buyers and shares the returns with the buyer after the completion of the tenure agreed upon at the time of purchase. The decision to buy an annuity can be made in any of the investment modes - in a lump sum or a staggered manner over time.
Types of Annuity Plans
Annuity plans come in all shapes and sizes, and the buyer of an annuity has the option to select based on their convenience.
- Deferred Annuity - In the deferred plan, the buyer pays some premium amount every tenure. Post-completion, the annuity is paid back to the buyer in their preferred mode over a period or lump sum. The plans are typical insurance annuity plans with life cover. In the case of the buyer’s demise, the nominee receives a lump sum amount.
- Immediate Annuity - As the name suggests, in an immediate plan, the annuity capital starts coming in right after the plan is purchased (as a lump sum.) These plans are best suited for individuals nearing the retirement age wanting to reap the benefits of their investment.
Based on the type of investment chosen, the immediate annuity plans have two options for the buyer. The buyer can decide how they would like to receive the returns.
- Variable Annuity -The payout in these plans is not fixed, meaning it is fully dependent on the company’s performance in the market. This gives the buyer an opportunity to get a better return than initially mentioned, or at times, lower than the expected returns. These plans are relatively riskier than fixed annuity plans and are better suited for informed buyers.
- Fixed Annuity -The payout in these plans is fixed, along with the tenure of the plan. It means that the buyer (or the nominee after the demise of the buyer) will keep getting the annuity as promised when investing in the insurance annuity plan.
Benefits of Annuity Plan
- Steady Liquidity - Almost all the annuity plans promise a lifetime of payouts. This is particularly helpful when you do not receive regular income. This pension-like payout makes the routine life of the buyer comfortable.
- Protection of Capital - Most annuity plans are designed keeping inflation in mind, rising medical expenditures, etc. This provides a safe investment option and shields against inflation over a period while building a corpus for retirement.
- Annunity Plan Tax Benefits - Yes, most annuity plans come with tax* benefits under sections 80C and 10(10D). Therefore, these investments grow over a period with savings from tax payments and improve the cash in hand when the payouts start.
- Principal Amount - The principal amount invested is protected in an annuity plan. This means that you can choose any mode of investment or payout. The minimum guaranteed# return will not go below the principal amount, thus ensuring that the buyers of the insurance annuity plan will at the least get the principal invested back.
Shortcomings of Annuity Plan
- Liquidity - Liquidating an annuity in the middle or prematurely is almost not allowed. This is primarily because the annuity plans are managed as a retirement fund that keeps the long investment horizons in mind while making investments. Some plans may offer the flexibility to withdraw the capital prematurely, but this flexibility comes with strict protocols and penalties.
- Opportunity Cost - In general, annuity insurance plans offer lower returns than many other market-linked products. This comparatively low rate of return on the investment is actually an opportunity cost and is a shortcoming with annuity plans.
- Expensive - Insurance companies selling annuity plans have to bear certain expenses - paying a team of investment managers and other operational costs.
Annuity insurance plans are a neat way to plan for retirement. They offer reasonable returns, savings against inflation, and tax benefits. An annuity plan should be a part of your investment portfolio.
- Joint family annuity.
- A deferred or an immediate annuity.
- Flexibility to choose between payout modes.
- Top-up option to enhance the payout.
- And you can avail of a loan against this policy to meet any emergency needs.
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