Buying Annuity Plans: Here's What You Should Note

What Are Annuities?

"An annuity provides the assurance that you will receive a fixed amount of money each month from the time you retire till the rest of your life. The insurer takes the risk of ensuring your money lasts as long as you live. Annuity plans, including deferred annuity plans, also help you lock your interest rate, eliminating reinvestment risk in a falling interest-rate environment," says Mahavir Chopra, director-health, life and strategic initiatives, Coverfox.com.

Types Of Annuities

Depending on the timeline when you want these annuity plans to provide you funds or guaranteed income source, there are

1. Immediate annuity plans
2. Deferred annuity plans

Immediate annuity: Here you buy in a insurance plan paying out a lump sum amount and then you are paid out regular pay-outs on an immediate basis. This is like the LIC's Jeevan Akshay plan. So, using the annuity you can to an extent substitute your salary income with guaranteed pay-out provided this way.

Say for instance in case of an immediate annuity plan with a corpus of Rs. 10 lakh you may get Rs. 3000- Rs. 500 annuity under different plans by different insurers.

Deferred annuity:

Herein first you accumulate a corpus and then later at the stage of retirement buy an annuity. This is similar to NPS retirement plan where it is mandatory to deploy 40% corpus into annuity plans on attaining 60 years of age.

In case the same is bought from an insurance company then of the total corpus it is mandatory to use at least one-third funds to buy an annuity.

Points to Note when buying annuity plans

1. Annuity plans covering both the spouses is advisable: Though the pay-out shall be lower, it shall be beneficial as on the death of one insured, the spouse will continue to receive payments for his or her lifetime.

2. Go for return of purchase price only when you wish to transfer your wealth to your children:

There is an option under annuity plans as per which initial purchase price can be returned to the nominee of such an investment, though it should be

3. Purchase of annuity at a certain age works good:

Returns from annuity plans are relatively low at 6-7% but they guarantee a steady cash flow and no risk to capital. Also as per expert reports, these products become attractive with a higher pay-out at a certain age say for instance at 70 years of age they offer better return.

This is because anything that increases the duration of payout from the insurance company will lower your annuity pay-out.

4. For financial security, also consider other retirement products:

In the current scenario to maintain a lifestyle similar to what you had during your working years and also beat inflation, you also need to some other investment options that yield good return such as SCSS, PMVVY, SBI WeCare deposit and similar products.

5. Only a small portion of total funds need to be allocated towards buying annuity:

Annuity are not deemed best product though reinvestment, guaranteed cash flow needs can be managed from the product. This is because of primarily given its illiquid feature and low return that may not be able to beat inflation. Importantly, if you are currently spending Rs. 15000 per month, considering a nominal inflation rate of 5%, you will require a sum of Rs. 30000 per month after 5-years or so.