Annuities – Know the Pros and Cons Before You Take One

“Retirement” is that phase in your life when your active income comes to a full-stop and you need to find alternate ways to generate regular income to meet your retirement expenses. Mr. Sharma too has retired and is exploring various avenues to generate income for his living needs. He is aware about annuities, their types and the various options that are available under an immediate annuity plan. (You can read the article on “Annuities – Let’s Explore the Options Available” to know more). But he wants to know the pros and cons of annuities before he takes one.

Let’s understand the pros and cons of an immediate annuity first.

Immediate annuities offer a number of benefits to the annuitant. As the annuity payments start immediately these plans serve as useful resources for your regular income needs post retirement. Besides irrespective of the prevailing interest rate scenario; these annuity payments generally remain constant and maybe useful, especially in the falling interest rate scenario. Immediate annuity plans offer various options to choose from; like life annuity, life annuity with return of purchase price, increasing annuity, joint life last survivor annuity and joint life last survivor annuity with return of purchase price. Depending on your requirement you can choose the option which suits you best. Annuity plans like the joint life last survivor annuity, joint life last survivor with return of purchase price and life annuity with return of purchase price help provide financially security to your spouse after you and can be a useful estate planning tool to leave a legacy for your legal heirs.

Drawbacks of Immediate Annuities:

Like every coin has two sides, immediate annuities do have some drawbacks which are worth knowing before you take one. Due to their low annuity rates and taxability these annuities do not help beat inflation; they cannot be liquidated easily and the option once opted for cannot be changed. However, there may be some plans which may offer a certain degree of flexibility in terms of withdrawals for treatment of certain critical illnesses.

Having understood the pros and cons of immediate annuities let us move to the pros and cons of deferred annuities.

The annuity payments under these plans do not start immediately but at a later date (vesting date). You get the flexibility to purchase this annuity by making a lump sum payment or investing periodically in installments. Deferred annuities, with future payments, can be part of your retirement plan’s development phase. As these annuity plans are viable tools in creating a pension corpus it is good to know that the returns earned during the vesting period are tax free. The investments / premiums that you make earn you tax benefits under relevant tax sections. Besides these benefits, one third of the corpus available at maturity can be commuted as a lump sum which will be tax free in your hands. An additional benefit worth mentioning here is that along with growing your pension corpus these plans generally give you a mortality or life cover that can be useful to the beneficiaries in case of any eventuality.

The main drawback of deferred annuities is their generally lower returns, potentially insufficient for retirement needs.

To wrap it up we can say that annuities with its various pros and cons need to be wisely selected. Whether choosing a deferred annuity for savings or an immediate annuity for income, select the right plan for your goals.

Happy Investing!!

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Annuities – Know the Pros and Cons Before You Take One

Published by Sharekhan Education | March 4, 2021