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Immediate Annuity Plans vs Fixed Deposits - Know The Difference

Immediate annuity plans and fixed deposits are different investment avenues for retirement planning. Each of these plans offers individual benefits, ensuring a better post-retirement life for you. Thus, knowing the differences can help you choose wisely.
 

According to one CNBC report, 60% of working professionals today will soon be moving towards retirement, claiming that by 2050, one in every five individuals will be over the age of 60 years with retirement plans.
 

Keeping these statistics in mind, it is crucial to understand the need for an effective retirement plan for you. It is imperative to ensure financial security and independence in your post-retirement life to enjoy a good second innings. Whether you plan to have a quiet, relaxed retirement or you wish to explore newer avenues, travel or rediscover your hobbies, retirement financial planning is a must.
 

There are varied options for you to choose from. Two such popular retirement plans are immediate annuity plans and fixed deposits.
 

In this blog, we will compare immediate annuity plans vs fixed deposits and help you choose the right one for you. Before we dive deep into understanding how to decide between the two, let us first briefly understand each of them and discuss some of their key features below.

What are Immediate Annuity Plans?

Immediate annuity plans, offered by life insurance companies, are financial products that provide a regular and guaranteed stream of income to the policyholder in exchange for a lump-sum payment or a series of premium payments. 
 

These plans are typically used as a retirement income strategy and offer financial security during the post-retirement phase.
 

Here's how they work: When you purchase an immediate annuity, you invest a specific amount of money with the insurance company. In return, the insurer promises to make periodic payments to you, usually on a monthly, quarterly, semi-annual, or annual basis, for the rest of your life or for a predetermined period. 
 

As these are immediate pension plans, the payments start on an immediate basis, generally from the month of investment.
 

Factors like the initial investment, your age, and the chosen annuity option determine the payment amounts.
 

Key Features & Benefits

  • Only a one-time investment of lumpsum amount, also called the purchase price, is required

  • No limit to the purchase price

  • Provide a predictable income source

  • Start receiving monthly income almost immediately

  • Flexibility to choose the number of years for the plan, starting as low as 5 years

  • Offer peace of mind for retirement planning
     

Immediate annuity pension plans come in various forms, such as single-life and joint-life options, allowing individuals to tailor them to their specific financial needs and goals.
 

Potential Drawbacks

  • Locks up the purchase price, leaving no scope of amendments later on

  • Underlying commission or fee payments can lead to lower monthly incomes

  • Interest rates have a direct impact on the monthly income you receive

What are Fixed Deposits?

FD or fixed deposits are financial instruments offered by financial institutions, such as banks, where individuals deposit a lump sum of money for a predetermined period at a fixed interest rate. 
 

This deposit remains locked in for the agreed-upon tenure, ranging from a few months to several years. During this period, the deposited amount earns a guaranteed interest rate that remains constant throughout, regardless of any fluctuations in market interest rates.
 

Fixed Deposits are considered a safe and low-risk investment option, as they are backed by the financial stability and reliability of the bank. They provide investors with a secure way to grow their savings over time while offering a predictable and assured return on their investment.
 

Upon maturity, the principal amount and the accrued interest are returned to the depositor. It's important to note that premature withdrawals may incur penalties or result in a reduced interest rate. 
 

Key Features and Benefits

  • Low-risk retirement plan option for retirees

  • Popular choice for individuals looking to preserve capital and earn a stable return

  • Fixed interest rates till the end of tenure

  • Flexibility to choose varying tenures and interest payout frequencies

  • No external aspects can impact your FD, including market fluctuations, changing interest rates, etc.

  • Option of renewal available post maturity of the FD
     

Potential Drawbacks

  • An increase in interest rate in the market does not increase your returns

  • Tax* might be payable on the earned interest, even without receiving the FD amount

  • Limitation of a minimum requirement of FD amount to invest

Immediate Annuity Plan vs Fixed Deposit: Comparative Analysis

 

S. No.

Factor

Immediate Annuity Plan

Fixed Deposits

1

Investment amount

Flexible with no upper/ lower limit

Minimum deposit amount is fixed

2

Liquidity

Monthly payouts

Payout only when the tenure is over

3

Tenure Period

Flexible

Flexible

4

Scope of Early Withdrawal

Flexible options available

Available but can incur penalties, fines, etc.

5

Tax*

Applicable on payout

Applicable on earned interest

6

Risk on Investment

Might incur high fees or commissions, leading to lower income

Changes in interest rates will not increase your returns as the interest rate is fixed

Which is Better: An Immediate Annuity Plan vs a Fixed Deposit
 

Who should opt for immediate annuity plans?

An immediate annuity pension plan provides a steady income stream, making it ideal for retirees seeking a predictable cash flow. It protects against outliving your savings as payments continue for life or a specified period. You can choose custom coverage with single-life, joint-life or annuity plans with return-of-purchase-price options.
 

Immediate pension plans are best suited for retirees or individuals looking for a secure retirement income source, especially those concerned about longevity risk.
 

Who should opt for fixed deposits?

FDs are low-risk investments backed by banks, ensuring the safety of your principal amount. They offer flexibility with various tenures and easy access to funds, making them suitable for short-term financial goals. FDs provide a fixed interest rate, offering stability and predictability.
 

Fixed Deposits are versatile and can be used for short-term goals, emergency funds or when you need a safer, easily accessible investment. However, they may not keep pace with inflation over the long term.
 

Best Option: Choose both for a balanced portfolio

Choose an Immediate Annuity Plan for reliable retirement income and risk protection, while Fixed Deposits are better for short-term savings and liquidity. A balanced portfolio might include both aligning with your specific financial objectives and risk tolerance and ensuring diversified retirement planning.

Final Takeaways

It is important to assess immediate annuity plans vs fixed deposits, to understand how much amount you should invest in each for optimum returns on investment. The choice between the two depends on your investment requirements, your desired liquidity and the principal amount you want to invest. 
 

Ensure in-depth research and calculations before investing.

 

Peaceful Retirement Awaits: Discover Your Perfect Pension Plan

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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!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

Is fixed annuity and immediate annuity the same thing?

The key difference between a fixed annuity and an immediate annuity plan is that one offers long-term benefits, while the other promises a regular income stream. 

Simply put, a fixed annuity is like an FD wherein your invested money is locked away for a fixed period, and you benefit from a fixed interest rate. 

In the case of an immediate annuity, you pay a lump sum amount and then receive a fixed income monthly till the said period for regular use.

Is it safe to invest in an immediate annuity?

Yes, investing in an immediate annuity is safe as it promises an income stream while providing security from market fluctuations, unlike other investment options. 

However, it is important to also look into the potential drawbacks, including the low scope of capital growth, limitation of amendments once the purchase price is fixed and slight complexity in understanding the basics.

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 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.

  • Tax: *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.

  • Guaranteed/Guarantee: Guaranteed# Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry.