Annuity plans in India refer to long-term insurance products that convert investment into a guaranteed income stream during the post-retirement years. Under the terms of the investment plan agreed upon with an insurer, the investor receives a series of fixed, or even varying, payments according to the annuity type. The annuity definition broadly refers to a financial arrangement where an investor receives periodic payouts in exchange for an initial investment or a series of contributions.
The primary purpose of an annuity in India is to ensure a stable income flow during retirement. While one can rely entirely upon accumulated savings, a steady annuity income stream adds to the retirement corpus and ensures financial security.
There are two broad stages in any annuity plan
Accumulation Phase
Here, one deposits money either via:
- Regular contributions
- Or via lump-sum investments
This money grows as per the annuity product selected.
Distribution or Payment Phase
At maturity of the investment or when the annuitant retires, the insurer begins periodic payments to the investor, which may take place either
- Annually
- Quarterly
- Half-yearly
- Monthly
The amount of the annuity payment depends on a variety of factors, such as
- Annuity Type
- Invested money
- Age of the annuitant
- Interest rates
- Market performance
- Policy duration
How Does an Annuity Plan Work?
The working process of the annuity plan differs depending on the annuity chosen. Nonetheless, here is a common sequence of events during the annuity cycle.
- Customer purchases an annuity plan.
- Payment takes place either periodically or all at once.
- Money accumulates over the tenure.
- After policy maturation or the retirement of the annuitant, the money starts paying out.
- Periodic payments keep continuing according to the payout option chosen.
Insurer calculates the payout considering mortality tables, interest rate levels, and investment performance.
Annuity Types in India
One must understand various types of annuity products in order to choose the right retirement plan.
Deferred Annuity
As per this investment scheme, there lies a gap period between the date of investment and the start date of payout.
During the waiting period
- Money accumulates in the account
- Investments grow as per the annuity type
- Retirement corpus increases
Usually, deferred annuities are preferred by people who wish to save up for their golden years.
Depending upon the type of deferred annuity, the following types exist:
Fixed Annuity
Fixed annuity guarantees fixed payments throughout the policy tenure.
Features of the same include
- Fixed returns
- Minimum risk exposure
- Constant income flow
- Stability against market volatility
The investor gets assured of the exact income he/she would be receiving each month in case of fixed annuities. That's why fixed annuities work well for conservative investors.
Variable Annuity
Variable annuities offer returns linked to the market performance.
Investments go into different market-linked instruments like
- Mutual funds
- Equity-based funds
- Bond funds
- Hybrid funds
Variable annuities comprise
Accumulation Phase
Money grows according to market performance.
Vesting Phase
Money starts paying out as per the amount collected.
The investor gets assured of the exact income he/she would be receiving each month in case of fixed annuities. That's why fixed annuities work well for conservative investors. A fixed annuity calculator can further help estimate guaranteed payouts over a defined period.
Immediate Annuity Products
Immediate annuity products generate income soon after their purchase.
The following is the way of payment
- The investor makes a lump sum contribution
- Payout starts soon after purchase or within days
It suits well those categories that include
- Retired persons
- Senior citizens
- People with an existing retirement corpus