Annuity plans: The best bet to ease your retirement

After having spent decades of your life working hard to meet your personal and professional goals, retirement is the phase of life when you want to be stress-free. However, whether your retirement dreams will come to fruition or not depends on the kind of financial planning you have done. Making the best use of your retirement corpus is the prime objective so that you can maintain the lifestyle the same as that when you were earning. For such a purpose, an annuity is a great option.
 
Under an annuity plan, you pay a lump sum amount to the insurer to build a corpus that’s available to you post-retirement through fixed payouts which can be monthly, quarterly, half-yearly, or annually. Typically, customers opt for a monthly pension option. People require a fixed income as a replacement for their salary during retirement such that they can manage their daily expenses. Indians have a lifespan of 80 plus years which is a minimum of 20 non-earning years. This translates to the need for a higher pension income. So, if you are nearing retirement, then investing in an annuity plan is the right choice for you. 

Why you should invest in an annuity?

The pandemic has made customers looking for safe investment options that give guaranteed returns. Those who are approaching retirement are cautious about where to invest the corpus so that they get a fixed income. Most importantly, in a scenario where interest rates on various investment options are falling drastically, it is important to build your investment portfolio wisely. For instance, Public Provident Fund, which offered 11 – 12 percent interest per annum in the 1990s, today merely gives 7.1 percent interest. Also, the rate of interest on bank fixed deposits has fallen from 8.5 percent in the year 2014 to 5.4 percent in the year 2020. These interest rates are further expected to fall by 3 – 5 percent in the next few years as the country evolves into a completely developed economy.

Annuity plans give a fixed rate of return between 5.5-6.5%. Annuity plans provide income not just for 10-15 years but for a lifetime. Moreover, the interest rate of the annuity plan is locked till the policy tenure ends. For example, if you are a 60-year-old individual and buy an annuity plan where the annual payout is 6 percent and after a decade or more, the rate of interest declines to 4 – 5 percent, you will still continue to receive a payout at 6 percent interest rate up to your policy term.
 
Moreover, in annuity plans, there is an option through which the spouse gets the pension for life on the death of the policyholder. There are some plans which give survival benefits as well. You can also choose from a host of options as to how you want to receive the income depending on your financial needs. In the last six months, annuities are gaining traction online because customers aren't willing to go physically to a bank and purchase it. You can find popular plans on Policybazaar such as HDFC Life Immediate Annuity and ICICI Prudential Guaranteed Pension Plan and can buy them easily from your home.

Types of annuity plans
 
There are two types of annuity plans- Immediate and Deferred annuity.
 
Immediate annuity plans are the ones in which you invest a lump sum amount and start getting a pension from the next month. In such annuity plans, one can choose the option of a life annuity with return of purchase price wherein the invested amount is returned to the nominee on the death of the policyholder. This option is suitable for customers who want to leave a legacy for their children behind.
 
There is also an option of joint-life annuity with return of premium option wherein the second life can be your spouse, children, parents, parents-in-law, or siblings who will receive annuity after your lifetime. This is typically for customers whose spouse is dependent on their pension. In Joint Life annuity, there are many annuity options available to choose from like 100% annuity can be given to the secondary annuitant, Joint Life Annuity with 50% annuity to the secondary annuitant, etc. Another option is Life Annuity with Return of Purchase Price on Critical Illness wherein policyholder gets income for life and return of purchase price on the occurrence of 7 Critical Illnesses or at the time of death. The annuity will stop on payment of purchase price on the occurrence of Critical illness. There is also an option of Life Annuity increasing at 5% p.a. In this option, the pension increases by 5% every year. This is a good option to beat inflation as medical expenses are rising day by day.  
 
In deferred annuity plans, you can start investing for a fixed period of time and build a corpus over the years. The lump-sum amount created from these savings will then be used to give a pension post-retirement. These plans are usually opted by customers who plan to retire in 5-6 years.