What is annuity - a beginner's guide

Are you working? Definitely you want to have a regular income even after your retirement. But there is no pension scheme in your office. Under these circumstances, you have to opt for annuity. This article has simplified the complex world of annuity. Read on....

Every person wants a regular income every month after retirement. In many organizations in India there is no provision of any pension scheme. For those people who are working in these organizations, annuity is a boon. However, very few people have detailed knowledge about annuity. In this article, we will discuss the basic features of annuity.

What is annuity?

In India, annuity is a contract between two parties – one being the company which is offering the annuity, and another being the buyer. Annuity is a series of equal payments which are paid at regular intervals. For example, if a person invests Rs. 10,000 per month for 20 years of his working life, his investment fund would be Rs. 10,000 X 12 X 25 which is equal to Rs. 30 lakh plus interest accrued thereon. With this amount, the person can buy annuity for the remaining part of his/her life as pension. The periodic payments can be made monthly, quarterly or annual basis. Annuity is becoming popular choice among people who want steady income after retirement.

Who provides annuity?

In India, generally the life insurance companies sell annuity. There are various options available before an investor. He/She is required to select any one of these options according to his/her own suitability and circumstances.

Different types of annuity

Annuities are of two types – the first one is deferred annuity and the second one is immediate annuity. A deferred annuity requires an investor to first build a corpus and then utilizing the corpus to buy an annuity. The National Pension Scheme (NPS) and pension plans offered by insurance companies come in this category. In other words, in case of deferred annuity, the money is invested for some period before payments are made. It is generally chosen by those individuals who are presently working and still have some years of work before retirement. Generally, deferred annuity come with a life cover which means that in case of death of policy holder, a lump-sum amount will be paid to the nominee of the deceased policy-holder.
In case of immediate annuity, an investor starts receiving payments as soon as the initial investment is made. If the investor is approaching retirement age, then he/she should opt for this type of annuity.

So in a nutshell, deferred annuity first accumulates money for a period of time and then starts making payment to the investor. On the other hand, immediate annuity starts paying money immediately. However, the investor must keep in mind that deferred annuities can be converted into immediate annuity, if he/she wants immediate payment.

Depending upon the type of investment, immediate annuity can be further classified as fixed and variable. In case of fixed annuity, the investor gets a fixed amount (payment) for a certain number of years. If the investor dies during the period, payments will be made to the nominee for the remaining years. If the individual survives the tenure, he/she would continue receiving the pay-outs for the rest of their life. In case of variable annuity, the pay-out varies depending upon the type of investment or the market performance.

Advantages of annuity

The major advantages of annuity are:
  1. The investor gets a regular income even after retirement.
  2. The amount invested in annuity is not taxed.

Disadvantages of annuity

The main disadvantage of annuity is low return on the invested amount. The impact of service tax is further lowering the return. Another disadvantage is that the insurance companies which provide annuities may charge a high commission, annual expenses, investment management fee, etc.

Concluding comments

Presently annuity market is under-developed in India. But if a person wants regular income after retirement and if he/she does not have the facility of any pension scheme in his/her office, then annuity is the fittest option for such person. However, investment experts advise the investors not to commit the entire corpus (saving) to annuity.

Article by Partha K.
“Those who will not reason, are bigots, those who cannot, are fools, and those who dare not, are slaves.” - George Gordon Byron

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Author: Umesh23 Feb 2017 Member Level: Diamond   Points : 1

Annuity is a type of pension only and those who want a sustained earning per month after retirement opt for this. Slowly it is becoming popular specially when the bank rates are on a decline.
Mr Kansabanik has very lucidly and beautifully presented the scenario of annuity today in India. The article has very nicely explained all the aspects with benefits and disadvantages. Please keep on posting such good articles for the benefits of all the ISC members.

Author: K Mohan25 Feb 2017 Member Level: Platinum   Points : 4

Though the author has given the wide prospects of earning potentials through annuity method and assuring pension plans in fixed way, the elders who have retired from their busy office life won't believe such schemes that easily. They have full and whole confidence in bank transactions and they prefer to invest in bank fixed deposits for a fixed interest every month transferred to the savings account and that would really benefit them month wise as pension. Moreover the bank managers are having very personal relations with the senior citizens of their banks and they very well know about the big amount that would be received after retirement and they are already convinced and made up by the bank manager to safely invest in the bank itself as fixed deposit with high interest. Some bank managers are even obliging themselves to visit the homes personally to collect the deposits by giving personalized service which may not be present with annuity operating companies. So what the author wrote may not be liked or followed by all retired senior citizens.

Author: Partha K.25 Feb 2017 Member Level: Platinum   Points : 3

For the information of readers, bank fixed deposits and annuity are two totally different instruments. In case of bank fixed deposit, the investor receives lump-sum amount at the end of the tenure. The amount consists of principal plus interest accrued on principal.
On the other hand, annuity gives a regular income in every month/quarter/year for a certain period of time against a corpus submitted to the annuity-provider.

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