Different Types of Annuities in India

 

As life expectancy increases due to new-age advancements in medicine, the focus is now shifting to improving the quality of retired life. Creating a nest egg is essential for intelligent financial planning for your golden years. Annuities are financial instruments that help you plan for your future strategically. You can choose from the different types of annuities. 

Carefully consider features and benefits that protect your investment and help you grow it adequately to meet your future financial goals. You must know, however, that annuities are not a ‘one-size-fits-all’ instrument. Therefore, let us understand all about annuity and types of annuity, shedding light on their unique characteristics, benefits, and considerations. 

This understanding of different types of annuities is sure to help you make informed decisions to secure your financial future.

What are Annuities?

An annuity is a contractual agreement between an individual and a financial institution. The latter is usually an insurance company to whom the individual makes premium payments. These are made either in a lump sum or at pre-decided regular intervals. In return, the institution promises to provide a series of payments back. These either start immediately or at a later point in time. 

Annuities become attractive from the retirement planning perspective because they offer a stable, lifetime income assurance for post-employment years. In fact, with annuities, you can never outlive your money. 

If you can select the type of annuity that suits your financial needs well, you can expect regular payments without making any extra effort.

However, no matter the annuity and types of annuity, they all have two stages to the contract - The accumulation stage and the Distribution/Payout stage. 

Now, the accumulation stage is the period during which you save by contributing to your post-retirement fund. This is the time when your corpus grows, and your annuity’s cash value is building. 

At the end of accumulation, the distribution stage starts. Now, you can start withdrawing funds towards your retirement income. You can do so by choosing regular, periodic payouts. This process wherein an annuity is converted into regular payments is called annuitization.

The Purpose of Annuities

Annuities are a great way to supplement other sources of income to create a retirement fund. An annuity plan is aimed at enabling the annuitant to live with financial security ensured by a regular payout. It also creates a sense of stability while one is alive and caters to your dependent’s financial goals as well if you die. 

Annuity payouts are best enjoyed with other income inflows like your pension and any social security benefits. With lifelong guaranteed regular income, an annuity assures the investor of a continuous source of financial inflow, even if all other sources of income or savings have depleted. 

What are the Different Types of Annuities in India

Here are the different types of annuities that are offered in India:

1. Immediate Annuity

An immediate annuity plan is a type of annuity where one-time lump sum premium payment is made. After that, a stream of income payments to the annuitant starts almost immediately within a month of the initial investment.

• This type of annuity is best suited for those wanting to put a lump sum, such as retirement savings, into a regular income stream to meet immediate financial needs. 
• The payouts from an immediate annuity can be fixed or variable, depending on your payout structure.

2. Deferred Annuity

A deferred annuity is a contractual arrangement with an insurance company. In deferred annuity, initially an individual would be required to build a corpus, which is used to purchase an annuity when retiring.

It ensures policyholders receive regular payments at a predetermined future date, usually for life. Thus, it is a great way to provide a reliable income stream for the annuitant.

• Unlike an immediate annuity plan, the payments under deferred annuity commence at a predetermined date in the future.
• Funds invested in a deferred annuity plan can grow through accruing interest or investment returns before the annuity payments start.

3. Fixed Annuity

A fixed annuity is a product where annuity payout will be the same throughout the time frame of the payment. It will provide stable and assured payout throughout the term after  a lump sum premium payment. Among the various types of annuities it is the most suitable for risk-averse investors seeking a consistent payout. The annuitants are shielded from market fluctuations in this plan. 

• The payout is made at a fixed interest rate on the investment that does not change for a pre-determined period. 
• This type of annuity provides a stable and predictable stream of income that preserves the capital offering a reliable source of retirement income. 

4. Variable Annuity

Individuals who opt for a variable annuity plan invest a lump sum, knowing that the returns will be variable.

A variable annuity directs your premium payments to investment options that may include various types of funds.  They are linked to the performance of the underlying investment options, such as mutual funds. This makes variable annuity a dynamic investment suitable for those who can take risks and are looking at high returns.

• Unlike fixed annuities, variable annuities lend an opportunity to earn great returns but entail market-related risks. 
• The annuitant can allocate their funds to different investment options based on their risk tolerance and financial goals. 

5. Lump-sum Annuity

Among the different types of annuities in India, this plan requires a single, substantial payment made upfront to the insurer.

In exchange, the annuitant gets a guaranteed stream of income for a pre-determined period of time. You can also opt for a lump sum payment. However, this option is available only after a certain period has passed.

Also, it may be that the complete amount will not be available for lumpsum payout. Only a partial bulk payment may be possible based on the terms of your plan.

• A lump-sum annuity requires a one-time investment, and regular payouts start coming in.
• This type of annuity is best for those who have a significant sum of money and are looking to create a reliable source of income for their retirement planning.

How Do Different Annuity Types Work?

Different types of annuities in India work differently. Read on to find out how varied types of plans work: 

• Life Annuity

  In this type of annuity plans, till an annuitant is alive, they will receive the payouts regularly as per the schedule planned - monthly, half-yearly or annually. However, once the person dies, their annuity will stop. 

• Joint Life Survivor Annuity

  A Joint Life Survivor Annuity is best for spouses receiving annuity payments for life. If one of them dies, the surviving spouse continues to receive payments. This type of income ensures ongoing financial support for both individuals.

• Life Annuity with Return of Purchase Price

  In this case, the annuitant receives the payout till they are alive. In case of their death, the initial amount used for buying the annuity is returned to the nominee. 

• Joint Life Annuity with Return of Purchase Price

  This is similar to Joint Life Survivor Annuity, where the payment continues till either of the spouses is alive. But when both pass away, the initial investment amount is paid out to their nominee.

• Inflation-Indexed Annuity

  An inflation-indexed annuity is designed to combat the impact of inflation on the investor’s purchasing power. In this case, the periodic payments are adjusted for inflation so that the income is in line with the rising cost of living.

• Annuity Payable for Guaranteed Time

  In this case, there is a guaranteed payout for a pre-fixed period. It could be five years, or 10 years, 15 or 20 years too. The payouts will continue till the end of the term, even if the annuitant has passed away. The annuity stops at the end of the guarantee period.

The Pros & Cons of the Types of Annuities

Among the different annuity plan options available, there are four broad variations - 

Immediate fixed annuity, immediate variable annuity, deferred fixed annuity, and deferred variable annuity. Here are the pros and cons of each of these for you to assess before you invest:

A. Immediate Fixed Annuity

Pros: 

• Income payouts start coming in right away
• It is an investment that does not require constant monitoring
• Assurance of the exact payout amount beforehand. 

Cons: 

• Payments stop if the annuitant does
• It is not an inflation-adjusted instrument
• Annuitants sacrifice their present-day liquidity to get guaranteed income later

B. Immediate Variable Annuity

Pros: 

• Features a guaranteed lifelong income that starts right away
• Presents an opportunity to gain from market upswings
• Offers a death benefit for the beneficiaries

Cons: 

• May prove to be more expensive due to market volatility
• Monthly payouts might keep fluctuating as they are market linked. This makes planning difficult. 

C. Deferred Fixed Annuity

Pros: 

• Simple to understand and manage
• Protects the principal investment
• Offers flexible payment timing
• The accumulation phase is tax-deferred
• No limits on the annual contribution
• Not affected by any market volatility

Cons: 

• It is not an inflation-adjusted option
• Imposes early-withdrawal penalties

D. Deferred Variable Annuity

Pros: 

• The accumulation phase is tax-deferred
• Presents an opportunity to gain from market upswings

Cons: 

• Imposes early-withdrawal penalties
• Risk of market fluctuation

Examples of Different Types of Annuities in India

Here are some examples of how different types of annuities are suitable for different financial goals and life circumstances:

1. Lifetime Annuity - Suresh and Leela Plan For Longetivity

Suresh and Leela are a retired couple in their 70s. They are looking for lifelong income. They chose a joint and survivor lifetime annuity to get continuous payments as long as either is alive. With this decision, the couple will never outlive their savings. Thus, lifetime annuities are a great way to create financial longevity.

2. Deferred Annuity - Aisha's Future Financial Freedom

Aisha is a 30-year-old software engineer, who wants to secure her retirement. She chooses a deferred annuity and starts making periodic contributions. Now Aisha's investment will grow safely over time and will create a substantial income stream when she retires. This way, she can benefit from long-term planning.

3. Fixed Annuity - Vikram's Predictable Pension

Vikram is a 55-year-old government employee who is averse to taking risks and needs stability. He opts for a fixed annuity plan with a predetermined interest rate. This plan will give him consistent monthly pension. The income predictability comforts vikram as he does not want to deal with market uncertainties once he retires. 

4. Variable Annuity - Neha's Market-linked Investment

Neha is a 40-year-old entrepreneur who likes to encash market opportunities. So, has opted for a variable annuity and has decided to invest in market-linked sub-accounts. Neha's choice will help her benefit from market gains. It is a good example of variable annuities' flexibility and risk-reward nature.

5. Immediate Annuity - Raj's Retirement Assurance

Raj Sharma is a 60-year-old retired banker. He is looking for a stable income in addition to his pension. He opts for an immediate annuity to convert his retirement corpus into a reliable monthly payout. This decision will provide Raj financial security to cover his day-to-day expenses and maintain his standard of living. 

Tax Calculations on Annuities in India

Given below is a rundown on how annuity payouts are taxed as per the current income tax slabs. It is important to remember that annuity payouts are considered to be an income and, hence, are taxed accordingly. Given that the payouts come in post-retirement, the relevant slabs (as per the old tax regime) given below are for senior citizens and super senior citizens of India:

Some other points to remember:

• Immediate/regular annuities are taxed in the year of receipt.
• If any annuity is surrendered before the policy matures, all gains are taxable. 
• Premiums paid for deferred annuities are eligible for tax deductions under Section 80CCC (1) of the Income Tax Act^#. Though certain conditions may apply. 
• If the annuitant dies, the nominee or legal heir may receive an annuity death benefit, which can  be treated as a capital receipt and hence not taxable.

Tips for Choosing the Right Type of Annuity

Here are some important tips and factors to keep in mind when choosing among different types of annuities for the one that resonates with your financial goals:

• Payment Duration:

  Consider the duration of the annuity payments. Different annuities offer different payout periods. Some are lifetime annuities; others are fixed-term annuities. Align the payment duration with your financial goals and anticipated needs for the best returns.

• Cover for the Spouse:

  If you are married or have dependents, you must choose an annuity that offers survivor benefits. Joint annuities ensure that your spouse receives payments even after your death. Thus, there is financial security for your loved ones as longevity concerns are adressed.

• Inflation Protection:

  Choose annuities that offer inflation protection. Such options come with cost-of-living adjustments in the form of increasing payouts. This helps to maintain the actual value of your income and ensures you can maintain your standard of living.

• Flexibility in Payouts:

  Assess how flexible the annuity payouts of the plan you are considering are. Find out if it is customisable and allows you to choose between fixed, variable, and lump-sum payments. Select a structure that aligns with your lifestyle and financial preferences.

• Professional Guidance:

  Never underestimate the importance of seeking guidance from a qualified financial professional. An experienced advisor will assess your financial situation, understand your goals, and offer suitable recommendations. 

Are Annuities the Right Choice for You?

Irrespective of what annuity and types of annuity you decide to invest in, they are suitable only if they match your risk-taking capability and financial needs. Annuities can be pretty reassuring as a retirement income plan. However, before you get into them, you must do your research and consult a financial advisor.  

Your financial advisor will assess your objectives, values, and financial status, before recommending a suitable annuity plan or any other pension plan or investment option. With professional advice you will be able to take a customised approach to investment that suits your specific needs and circumstances. Well-informed decision-making always works better when it comes to building a secure financial future.

Conclusion

In India, you will find various annuity options to secure your financial future. By now, you must have understood that making the right decision about annuities is a detailed process. It involves a careful consideration of several factors. To assess types of annuities, you must evaluate payment duration and survivor benefits. You also have to consider inflation concerns and check the payout flexibility. With professional guidance and thorough research, you will be able to choose the most suitable annuity for your immediate needs and future financial goals. 

FAQs on Types of Annuities

Q: What is an annuity, and how is it classified?

A: An annuity is a financial product offering regular stream of payments. It is often used for retirement income. It is broadly classified into immediate and deferred annuities, fixed and variable annuities, and lifetime or fixed-term annuities.

Q: What is the best type of annuity plan?

A: The best type of annuity plan is the one that suits your financial goals and ticks many other boxes such as your risk appetite and preferred income structure. 

Q: What are the different types of annuity schemes?

A: The different types of annuities include immediate and deferred annuities, fixed or variable annuities, and lifetime or fixed-term annuities.

Q: How does an annuity plan work?

A: In an annuity plan, the annuitant makes a lump-sum payment to an insurance company. The latter, provides a guaranteed income stream for a pre-determined period or life. The payout structure and timing will depend upon the typeof annuity you chose.

Q: When is the right time to buy an annuity?

A: Generally, it is best to purchase annuities closer to retirement. This helps create a reliable income stream. However, individual circumstances, market conditions and personal financial goals influence when you buy.  

Q: How much do I need to invest in an annuity?

A: The amount you invest in an annuity depends which annuity you choose, the income you want from it and the prevailing interest rates. Discussing with a financial advisor is always a good first step in this direction. 

Q: How are annuities taxed?

A: All types of regular annuity payments are taxable in the hands of recipient at the rates applicable as per their relevant slab rates.

Related Articles:

• Annuity Plan - Meaning, Types, Taxation and Calculation
• Types of Pension Plans and Their Tax Benefits
• Make Your Retirement Financially Secure with Annuity Plans
• Annuity - Meaning, Benefits and Types
• Breaking down the Retirement Planning Process into Manageable Steps

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