To be able to live your golden years well, it’s essential to have an effective pension plan in place. When you’re rest assured that your principal is safe and is coupled with a steady income plan, it will help you live your retired life without financial stress and worries.
With an increase in life expectancy as well as in the middle-aged population in India, there’s a need for stable income-generating products for retirement. While evaluating various retirement plans in India is a time-consuming process, an ordinary annuity plan is a contemporary and steady option to consider.
What is an ordinary annuity plan?
Under an annuity plan, the policyholder enters into a contract with an insurance company and provides them with a lumpsum amount. The insurer in return makes consecutive payments to the policyholder at regular intervals for a certain number of years. This ensures that the policyholder keeps receiving a steady source of income with returns even after retirement.
Companies make this payment on a quarterly or monthly basis, as selected by the policyholder. They may even choose a semi-annual or annual basis for the payment. You can use a retirement calculator to get a sense of what your retirement corpus should look like and invest the lumpsum amount in an annuity plan accordingly.
The benefits and characteristics of an annuity contract depend on the plan as every annuity contract is unique. It also depends upon the insurance company and in what manner the policyholder decides to use the annuity.
What are the benefits of annuity plans?
Ordinary annuity plans offer several benefits:
- Financial security
An annuity plan provides a sense of security with a steady income over a certain period. It enables the policyholder to plan their post-retirement life as the returns are certain. The fiscal strength of the insurance company determines the financial security of the policyholder. It is always advisable to choose the insurance company judiciously.
- Risk mitigation
Annuity plans provide a fixed sum for the specified period selected by the policyholder. Hence, you can select a suitable policy term to ensure that the plan mitigates the risk of longevity. By determining the right amount required as your retirement corpus, you can also mitigate the risk of needing to reinvest later at lower interest rates.
- Protection of insurance
Certain types of annuity plans come with the option of an additional insurance cover. This means that in case the policyholder passes away during the policy term, their dependents receive a pay out to help support them financially.
- Taxation benefit
When you opt for an annuity plan with an insurance element, you receive certain tax benefits. The premium paid for the policy is eligible for income tax deduction under section 80C of the Income Tax Act, 1961. Additionally, the insurance cover proceeds are exempt from tax in case the policyholder passes away and the proceeds are paid to their nominees.
Limitations or drawbacks of annuity plans
Ordinary annuity plans have some limitations as well. They are:
- Low rate of return
This plan offers a low rate of interest as compared to other fixed income plans available in the market.
- Low liquidity
You block your money permanently when you buy an annuity plan. There are some plans with a partial withdrawal facility, but they carry a considerable charge as premature withdrawal cost.
- High costs involved
Annuity plans are high built-in cost models. They charge the fees initially, in addition to the ongoing fees during the tenure of the plan. As a result, the corpus value reduces.
What are the types of annuity plans?
- Immediate annuity plan
In this plan, the policyholder receives periodic payments starting immediately upon the initial investment with the insurance company.
- Deferred annuity
In such plans, the insurance company begins making the annuity payments at a decided future date instead of immediately.
- Life annuity
In the case of a life annuity plan, the annuity payments are paid for the policy period only as long as the policyholder is alive.
- Guaranteed period plan
As opposed to a life annuity plan, in a guaranteed period plan, the annuity payments are made for the fixed policy period, even if the policyholder has passed away.
The right age to invest in an annuity plan
There is no one right age to get an annuity plan. However, insurance companies typically offer annuity plans for the 30-85 age group. The age eligibility differs depending on the type of annuity plan and the insurance provider.
When deciding what age is right for you to get an annuity plan, consider factors such as risk perception and retirement goals. One should also consider using a retirement calculator to optimise the advantages and returns from such plans.