In recent times, retirement is not just limited to retiring from services/businesses and leading a quiet life away from the hustle and bustle. For many, retirement is an opportunity to fulfil their much-awaited goals like travelling the world, starting a business, taking up a vocation, engaging in a hobby and so on.
Having a stress-free post-retirement lifestyle where you get to pursue your goals requires financial independence and careful financial planning. Also, with most new-age professionals planning early retirements to find time for things they actually love, it has become especially important to start retirement planning early and to start it right.
There is a range of financial products targeted toward long-term retirement planning. One such product is an annuity plan, which can be an excellent investment avenue for ensuring regular income throughout your post-retirement life.
However, any financial product requires detailed research and careful consideration before you put your money into it. In this article, we will look at the pros and cons of annuity policies and determine whether they are a good retirement investment avenue.
What is an Annuity Plan?
An annuity plan is a financial product designed to provide a regular stream of income after retirement. When you buy a retirement annuity policy from a life insurance provider, you enter into a contract to purchase an annuity.
To buy an annuity plan or buy an annuity, you need to pay a purchase price. The purchase price can be paid as a lump sum amount or as a regular payment. This depends on the choice of annuity plan. Annuity policies are of two types - Immediate Annuity Plan and Deferred Annuity Plan.
An Immediate Annuity Plan, as the name suggests, pays out the annuities/regular income immediately after paying the lump sum purchase price. This is ideal for individuals close to retirement. They can invest the lump sum retirement benefits received in an annuity policy and the insurer will start paying out the applicable annuity immediately.
A Deferred Annuity is great for long-term retirement planning. Young professionals can start investing with regular payments to the plan and the insurer will start paying out the annuities from the predetermined date.
You can tailor an annuity plan based on your specific needs and financial goals. However, it is important to understand the pros and cons of buying a retirement annuity policy before you proceed with purchasing one.
Pros of Annuity Plans
Guaranteed1 lifelong income: One of the primary advantages of annuities is that you get guaranteed1 and regular lifelong income. It perfectly serves as an income source in your post-retirement life and is especially helpful for people who do not have a pension. This allows you to live a financially stable and independent life even after your retirement.
Just make sure that you choose the correct amount and frequency of annuity payouts to ensure optimum financial protection.
Life cover: Some retirement annuity plans offer death payout benefits. As a result, you can combine the benefits of post-retirement financial security for you with financial protection for your loved ones.
In an annuity policy with life cover, you get a regular annuity payout. In case of your unfortunate demise, the appointed nominee will receive the pre-decided death benefit, ensuring their financial well-being.
Security against inflation: With an annuity plan, you can ensure protection against inflationary pressures. As time passes, there is a rise in the cost of living and the price of commodities. Additionally, as a senior citizen, you will be concerned with the exponential rise in healthcare inflation.
Having a regular source of income post-retirement helps you plan your financial future and your expenses. With a retirement annuity plan, you are better prepared to take care of any financial emergencies and save enough for a rainy day.
Annuity plan tax* benefits: Buying an annuity plan helps you enjoy tax* benefits under the Income Tax Act as per the prevailing tax* norms. The amount you pay towards annuity plans helps you reduce your taxable* income.
Cons of Annuity Plans
Returns: A majority of people prefer low-risk investments for their retirement. An annuity plan is a safer choice for your crucial retirement financial planning as the lower returns come with the guarantee1 of assured and fixed regular payouts.
Lack of liquidity: One of the cons of annuity plans is the limitation on premature or partial withdrawal of accumulated funds. Some plans may allow it; however, it entails strict guidelines and a detailed procedure.
However, remember that the primary goal of buying a retirement annuity policy is retirement savings. So, easy withdrawals will defeat the purpose of investments, making the plan highly unproductive. Thus, the lack of liquidity in retirement annuity plans rather works in favour of an optimum retirement plan.
So, Should You Buy an Annuity Policy?
Your retirement plan is a product of various aspects, such as your financial situation, goals, risk appetite, post-retirement plans, financial dependents, a pension from your employer, planned expenditure and so on. Retirement annuity plans are a great choice if you wish to invest in low-risk avenues which offer a guaranteed1 and regular income after retirement.
However, remember that annuities do not allow premature or partial withdrawal of funds. As a result, it will be unwise to invest all your funds into an annuity plan. Diversification is the key to retirement financial planning. Ensure you create different types of funds for family emergencies, medical emergencies and so on. An annuity plan should only be considered as a regular source of income.
Also, make sure you invest some time in choosing the correct annuity policy for your needs. Compare annuities before purchasing a plan for your needs. Go through the website of your insurer and read the product brochure in detail. The features and benefits of retirement annuity plans vary with every provider.
For instance, at Tata AIA life insurance, we offer an annuity plan with immediate and deferred payouts, joint annuity benefit, choice of annuity payout modes, loan against the policy, guaranteed1 lifetime income and added benefits for online purchase.
Additionally, with Tata AIA Annuity Plan, you can opt for a death payout benefit, wherein your nominees will receive a specific, predetermined amount as a death benefit in case of your unfortunate demise. This way, you secure not only your post-retirement life but also your family’s future.
Retirement finances are a crucial part of your financial plan. And, annuities are a great avenue to ensure fixed regular income after retirement. However, ensure you go through the features, benefits, payouts, inclusions and exclusions of the plan before you purchase an annuity. Also, compare annuities before you finalise the right plan for you.
For more information about the Tata AIA life insurance annuity plan, get in touch with our experts today.