Annuities provide a consistent flow of income in retirement, but it is important to read the tiny print.
Making ensuring that wealth lasts is more important to many Indians who are getting close to retirement than accumulating wealth. Annuity plans may help in this situation. Annuities, which are mostly provided by insurance companies, are intended to provide you with a guaranteed income stream—often for life—in return for a one-time investment.
The operation of annuity schemes
Think of an annuity as a way to transfer your funds into a pension plan. A insurance company receives a sizable payment from you, and they will provide a fixed payment at a certain interval (monthly, quarterly, or yearly) until your annuity runs out, which is often when you pass away. Your present age, the kind of annuity you have, the amount you pay, and the interest rates at the time all have a role.
Various kinds of annuities
There is no one-size-fits-all solution. Certain plans, referred to as instant annuities, pay out immediately upon issuance, while other policies, known as delayed annuities, pay out over a period of years. Additionally, there are variable annuities, whose payouts fluctuate according on returns, and fixed annuities, whose payments are constant. The most common option among Indians is the “annuity for life” option, which pays out until the policyholder’s death.
Why retirees think about them
The biggest advantage is mental tranquility. Unlike market-linked products, annuities do not fluctuate in value as stock prices do. For retirees, it means having a steady income to cover bills, healthcare, and necessities like food. In a world when healthcare costs are rising and family benefits are unpredictable, predictability is a highly valued asset.
The catch you must be aware of
Annuities guarantee predictability as well, but they are not flawless. Depending on your plan, income ranges from 5 to 7 percent annually, and after you invest your lump amount, your money is often gone forever. Because annuities are illiquid, it is crucial to invest a portion of your money while maintaining a reserve for emergencies.
Implications for taxes
These annuity payments are considered income and taxed as your slab. Therefore, regular income guarantee is not precisely tax-free income, even if it may seem nice. Because of this, it is important to manage your whole retirement portfolio so that annuities complement other tax-efficient plans like PPF, EPF, or NPS rather than replace them.
The bottom line
Annuity programs are not for anyone looking for high returns. Their goal is to secure your retirement years before a regular monthly income, such as a paycheck. Annuities are an essential component of a successful retirement plan for those who choose certainty over flexibility.