Retiring in the comfort of money

With some good planning, annuity options could help ensure financial security in retirement

Retirement is a word that scares many. The very thought of living your life with a reduced, or no income in a society where everything becomes more and more expensive with every passing year, is a scary one if you have not planned well.

On the other hand, if your financial plan is sound and if you have an assured, constant stream of income coming in without any effort on your part, retirement can be an enjoyable and a fulfilling experience as well.

You could focus on your family, give time to your hobbies, travel, spend quality time with your grandchildren and so on. The idea is that if you have secured your after-retirement life, then you can use your time to do those things that you missed out on due to the daily grind of your hectic work life till that point.

And, with ever-increasing medical inflation and higher life expectancy, it has become even more crucial that you plan for post-retirement life wisely.

Interest rates on bank fixed deposits (FD) and the Public Provident Fund (PPF), the two most popular long-term savings instruments, continue to fall and are at a decade low; it is time to consider switching to products that offer guaranteed returns. The Public Provident Fund, which offered 11–12% interest per year in the 1990s, now only offers 7.1% interest. Similarly, the interest rate on bank fixed deposits has fallen from 8.5% in 2014 to 5.4% in 2020.

Annuity plans enable you to receive regular payments for a lifetime after investing only once in lump sum. The regular payments can work as a pension and can be used to cover your essential expenses and also to maintain the kind of lifestyle that you are used to.

Some annuity plans continue payments even after your death, and pay the same to your spouse. Moreover, many such plans also return the entire invested amount after the death of beneficiaries to their nominees, which could be your children. So you need not worry about their financial future either.

Let’s have a look at some of the different types of annuity plans that are available in India.

Immediate annuity

Under this plan, you start receiving payments immediately after you make the initial lump sum investment. It is a good idea to opt for this type of annuity if you are approaching retirement age or have just retired. If you have been investing in various investment instruments for your retirement fund throughout your life, you could use those savings and opt for an annuity plan at retirement to begin receiving regular payments every month, quarter, or year, depending on your needs.

Deferred annuity

In a deferred annuity, the money is invested for a specific period before payments are made. It is only an option for those who are still some time away from their retirement.

Fixed annuity

Under fixed annuity plans, the amount of regular payments is fixed for the entire duration of the annuity plan. Moreover, in such plans, the duration of the plan is also fixed. So, if the insured dies during this period, the nominee of the insured will receive the fixed payout.

Joint annuity

In joint life annuity plans, the annuity is paid to the spouse during her entire lifetime after the death of the annuitant. This is a great option for those where the couple depends on one income. This way, even after the death of the income-earning member, the other member’s future would be secured.

Purchase price return

While the annuity plan will ensure fixed and periodic payments for you during your entire lifetime, the insurance provider would also return the initial amount that was used to buy the annuity plan to the nominee after the death of the annuitant.

This option is available for both single-life and joint-life variants. In the case of the latter, you would first receive the regular payments. After your demise, your spouse would receive the payments. And finally, the initial amount of investment will be received by the nominee after the death of your spouse.

Across service providers in the market, these plans offer you a range of returns.

For an investment of ₹10 lakh, a person aged 55 can expect annual returns of about 5.35% to 6.3% till the age of 80, after which the invested amount comes back to the individual. Similarly, a person starting an annuity at age 60 can expect to see returns between 5.4% to 6.28%, depending on the choice of provider.

Lock in returns

The benefit in an annuity plan is the ability to lock into specific returns for a long period, vis-à-vis PF or FD options that may depend on the whims of the market or on decisions by the government of the day.

So, one may say that annuity plans are designed in a way to give you a comfortable life after your retirement by offering you financial security.

These are one of the safest investment tools with a guarantee for life. They come with flexibility of payments allowing you to choose the periodicity at which you want to be paid as per your requirements.

(The writer is Head-Investments, Policybazaar.com)

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