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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.
