For most people, retirement is a milestone, which looms as a distant dream and gradually transforms into an imminent reality. In a nutshell, retirement holds a promise of freedom. However, that freedom during the golden years cannot be achieved without financial security. The two go hand in hand.
This dual goal of financial security and freedom doesn’t come without meticulous financial planning during the early years. Yet, not everyone plans for the retirement they dream of. A recent report revealed that while over 75% of working Indians aspire for a comfortable retirement, only 33% actively plan for this and save or invest for their retirement.1
Annuity plans: A boon for post-retirement life
Saving is only the first step towards a secure future. You need to invest those savings to create a corpus that will pay for your post-retirement expenses. There are several options where one can invest, and all these options come with their own merits and risks and hence cater to people with varying risk profiles. However, for retired people, the most important aspect of an investment is the guaranteed income they need every month to survive and lead a good life. And hence, investment instruments which have the unpredictability of market volatility may be less appealing to them and should be avoided. So, where lies the answer?
Enter annuity plans. These are financial instruments specifically designed to provide a steady and predictable income stream during retirement. Annuity plans come in different forms, both in terms of the initial investment and payouts. One can start an annuity plan with a lump sum payment. Or they can make a monthly payment for the plan during their working years. They can also choose a mix of the two.
Monthly payments are good for those who are in the initial stages of their careers and have a long time ahead of them till they retire. On the other hand, those who are about to retire — or have already retired — and have a lifetime of savings invested in other market-linked assets, can benefit from transferring those savings to annuity plans in a lump sum payment. This will protect their savings from volatility of the market while creating a regular income stream.
Then, in terms of the payouts, one can go for immediate annuities, where regular payments to the policyholder start right after the initial investment. One can also choose deferred annuities, where payments start a certain period after the initial investment.
Deferred annuity to secure your future
A deferred annuity plan is basically a tool to compound your investment before you start dipping into it. These plans are suitable for those who are still some years away from retirement and are planning a stable and regular income during their post-retirement years.
Let’s understand through an example how deferred annuity is different from immediate annuity. Let us assume that a 60-year-old, at the time of their retirement, invests Rs 50 lakh in an annuity plan with a return rate of 8%. If the annuity payments start immediately, then they get around Rs 29,400 per month throughout their life. On the other hand, if the same individual invests the same amount when they are 50 years old and defers the payout by ten years (that is when they turn 60), then they get around Rs 53,000 every month throughout their life. That’s the power of deferred annuity plans. For the same initial investment, the payout almost doubles.
Deferred plans also come in a few variants. A single-pay deferred indemnity plan is one in which the investor makes a one-time lump-sum payment. After the pre-decided deferment period, the annuity payments begin and provide a lifelong income stream. Alternatively, there are regular pay deferred annuity plans where the investor makes periodic contributions over the deferment period. In this option, one can build their retirement corpus gradually as their investment compounds over time. Deferred annuity with a return of purchase price, where the initial investment amount is returned to the nominee after the annuitant's demise, is another comprehensive option. This adds an extra layer of financial security for the beneficiaries.
An example of a regular pay deferred annuity is where a 45-year-old individual invests 10 lakhs every year for 15 years. Starting from 16th year (when they turn 60), they start getting 16.8 lakhs every year for their entire life. With the return of the premium option, post the demise of the individual, the entire premium amount (1.5 crores in the above example) is returned back to the nominee tax-free.
Deferred annuity:A strategic choice
First and foremost, deferred annuity plans guarantee income for the life of the policyholder. Moreover, under this plan, the payouts are predictable and regular. With the ferment of payouts, one is guaranteed the benefits of compounding thus resulting in a larger monthly payout as opposed to immediate annuity plans. These plans ensure that the retirees do not outlive their savings. With increasing life expectancy, this is ever so crucial. Annuity plans also protect retirees against market fluctuations and economic uncertainties.
The best part of these plans is that one can lock the rate of interest at the time of purchase. It is expected that interest rates would fall over the long term and annuity plans are the only investment avenues that let you lock in the rate of return for your lifetime. The cherry on top is that the contributions to annuity plans are eligible for tax deductions under Section 80C of the Income Tax Act.
It can be said that deferred annuity is a well-rounded retirement plan and is indispensable for ensuring a comfortable and financially secure retirement.
Sources:
Contributed by: Vivek Jain, Head, Investments, Policybazaar.comDisclaimer: The above content is non-editorial, and TIL hereby disclaims any and all warranties, expressed or implied, relating to the same. TIL does not guarantee, vouch for or necessarily endorse any of the above content, nor is it responsible for them in any manner whatsoever. The article does not constitute investment advice. Please take all steps necessary to ascertain that any information and content provided is correct, updated and verified.