What are the Different Types of Annuities?

What is an Annuity?

In the simplest words, an annuity is a chain of the periodic payments, which are made from time to time from a lump sum corpus. Therefore, the annuity payouts are a regular source of financial income.

An annuity essentially assures an individual that even if the rest of the assets are depleted for one or the other reason, an annuity will always have the additional income coming in.

In the world of uncertainties, an annuity is the most certain thing to rely on. Depending upon the needs of individual, different types of annuities is offered in India. Besides, the purchasing of an annuity is considered to be one of the most common ways to finance retirement expenses. Moreover, an annuity is mostly considered as a form of insurance and not an investment alternative.

Today, we have different types of annuities in India and should be opted by every individual who is looking forward to a steady source of income post the retirement. Let us take a quick understanding of the different types of annuities in India that are offered.

Types of Annuities in India

Listed below are the key types of annuities being offered in India:

1. Immediate Annuity

An immediate annuity essentially refers to the annuity wherein the premium is paid in a lump sum and not multiple numbers of times. With the immediate annuity contract, an individual will receive a guaranteed payout at regular interval of time. An immediate annuity should be bought by those individuals who are at the verge of retirement and are looking forward to receiving income every month with immediate effect.

2. Deferred Annuity

The key highlight of the deferred annuity is that initially an individual would be required to build a corpus, which is used to purchase an annuity when retiring. Most of the life insurance companies permit the bit across a pension plan. When the period of the pension plan ends, an individual may buy the annuity with the money accumulated. However, in case if an individual has invested in a pension at the stage of an accumulation from any of the insurance provider, then it is a mandate to invest one-third of the amount during retirement in the annuity.

3. Fixed Annuity

If an individual intends to buy a fixed annuity, then the annuity payout will be the same throughout the time frame of the payment. In like manner practice, the fixed annuity is a moderate traditionalist choice as they are generally put resources into fixed income instruments. Thus there is conceivably little development of the chief sum contributed over the accumulation period of the annuity plan. Be that as it may, from multiple points of view, a fixed annuity is ideal as a benefits payout because this framework ensures income to the individuals in the after retirement.

4. Variable Annuity

The variable annuity is structured to offer varieties in the annuity payouts in the middle of one payout and the following. This variety is in significant part connected to the market execution of the investments made by the pension fund or annuity that the individual has put resources into. On the off chance when the returns are good and are gotten by the organization dealing with the plan, the annuity payouts shall be more in any case the annuity payouts will be lower. Because of being market-connected, variable annuities can't give ensured results, which make them a nearly unsafe suggestion for a few retired people or planned customers. At present, perhaps the best case of variable annuity investment is the NPS plot, which is a market-connected venture, doesn't give guaranteed returns or payouts, not at all like the previous frameworks of either the state or the central government benefits, which are gradually being eliminated.

5. Lump-sum Annuity

Most of the types of annuities in India offer regular payouts after a   stipulated period; however, the annuity also offers the alternative to provide the payout in a lump sum. It is to be noted and understood that the lump sum payout is an alternative and accessible only at a specified period. There is also a possibility that the complete retirement benefit might not be availed as a lump sum.

Tax Calculations on Annuity in India

Annuities are intended to give the advantage of pension payouts, which from the outlook of the authorities of the income tax is dealt with like a month to month salary.

Along these lines, it is burdened by the overall existing rules of the income tax. It is likewise critical that the pension payment is added to pay from every single other source as a major aspect of the taxable salary of an individual. According to ongoing changes in the section rates, the present income tax slabs relevant to annuity payouts got by an investor individually, which could either be a senior resident or a senior citizen are as follows:

Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer. Tax benefit is subject to changes in tax laws. *Standard T&C Apply

How Does Annuity Work?

Listed below are some pointers that will let you understand the working of different types of annuities in India:

• Life Annuity: Till the time, the individual is alive; it will receive regular payouts annually/semi-annually or monthly. The annuity will stop once the individual is no more alive.
• Joint Life Survivor Annuity: The payment will be received until the individual or the spouse passes away.
• Life Annuity with Return of Purchase Price: An individual will receive the annuity payment till alive. In case the individual passes away, the insurance provider would return the initial amount that was earlier used to buy the annuity and would be given to the nominee. This is an ideal option for those who wish to leave a legacy thereafter.
• Joint Life Annuity with Return of Purchase Price: The payment will be received until the individual or the spouse passes away. In case, both of them pass away, then the initial investment amount will be paid to the nominee.
• Inflation-Indexed Annuity: Consistently, there will be an ascent in the annuity payable at a specific rate. Even though it may not be connected to the genuine inflation rate, the method of reasoning is that it would deal with the increment in costs somewhat.
• Annuity Payable for Guaranteed Time: The annuity is to be paid for an ensured period, state 5, 10 or 15 years regardless of whether the annuity purchaser kicks the bucket. Annuity stops either on the passing of the annuitant or fruition of the period of guarantee, whichever is scheduled.

Tips for Choosing an Annuity

When it comes to buying an annuity, listed below are some important considerations that should not be overlooked by an individual on the premise of the circumstances:

• Payment Duration: Any individual who intends to buy an annuity may opt for the duration of the payments as per their convenience. However, it is prudent to understand that a short period implies payment on a higher side but at the same time at some point in time the income will stop coming. For instance, an investor might need some sort of boost in the income specifically when paying off during mortgage final years.
• Cover for the Spouse: In the case where the buyer of the annuity is married, the buyer can opt to go with an annuity, which pays for the remaining life of the spouse or the buyer itself depending upon the longevity. If the buyer pays for the remaining life of the spouse then it is also known as joint and survivor annuity. Undoubtedly, choosing this option most likely means that the payment would be low, however, it secures both the partners irrespective of the circumstances.

Case Study on Different Types of Annuities in India

With the following examples let us understand the types of annuities more closely:

• Rajan Shahi, a 45-year-old individual is stressed over his retirement. He needs to get retired at 60 years of age and hopes to live till the age of 80. He tries to get a fixed month to month annuity of Rs 60,000 for a long time after retirement supposedly 20 years. Thus, he has been encouraged to purchase an annuity item, which will accomplish his port retirement income goals by gathering a corpus of around 80,000,00 until his retirement.
• In another situation, if Rajan needs to resign at 55 years of age, he'll need a corpus of roughly Rs. 95,00,000 at retirement.
• Rajesh then again additionally needs to resign at 60 years of age, at the same time, rather than a fixed sum, he needs his annuity to increment by 5% consistently. The assessed corpus ought to associate with 1 crore if his future is equivalent to Rajan.
• Rajan and Rajesh, alongside their spouses likewise have the alternative of joint-life annuity, which will keep on offering advantages to his significant other after he passes away and the partner is alive.

The various sorts of annuities likewise guarantee that you can make sure about consistent income for your life partner regardless of whether you pass away early.

In this manner, the annuity is an excellent choice for retirement subsidizing. You ought to comprehend the various types of annuities in India and afterwards pick a variation, which is generally reasonable for your retirement arranging necessity.