Annuities – Let’s Explore the Options Available

Published by Sharekhan Education | May 4, 2021

Annuities – Let’s Explore the Options Available

Mr Sharma has just retired from work and his prime goal now is to get an alternate income to meet his living expenses. He has shortlisted a few investments which generate regular flow of income and may fulfil his requirements. One of them is an Annuity Plan. However he is not able to decide which option to select from the various available.

For those new to Annuities let us first understand annuities, its different types and then explore the different options available.

Annuities, popularly known as pensions are plans offered by Life insurance companies. Life insurance is a risk management tool; which typically takes care of the risk of dying early and the risk of living too long. Annuity Plans play an important role in mitigating the risk of living too long.

Many a times it is seen that what you get is not what you had asked for; so unless you check the policy how will you know that it is the right one?

Annuities have a very simple modus operandi; you the annuitant need to invest either periodically for a stated period or invest a lump sum amount to purchase the annuity of choice. The pension payments will start after the stated period or immediately depending on the plan opted for. This classifies Annuities into two major types:

The Deferred Annuity plans & the Immediate Annuity plans.

Let us quickly understand the two. As the name suggests a deferred annuity does not start immediately but at a future date (vesting date). Investors can make investments either as a lump sum or periodically. Upon reaching the vesting date, annuity payments commence.

While on the other hand an immediate annuity starts immediately. You invest a lump sum and start receiving the annuity payments – monthly, quarterly, half-yearly or yearly; at a frequency that matches your living needs.

A deferred annuity plan can be a part of the development phase of your retirement plan while an immediate annuity is suitable for retirees like Mr Sharma who are looking for a source of regular income.

Having understood what an annuity is and the role it plays in your retirement plan let us now explore the various options available under an immediate annuity plan.

Life Annuity – In this option the annuity is payable as long as the annuitant is alive.

Life Annuity with Return of Purchase Price – The annuity is payable till the life time of the annuitant and after his death the purchase price is returned to the nominees.

Annuity Certain for 5/10/15/20 years: – Here the annuity is paid till the annuitants alive or till the guaranteed period whichever is later. For example if Mr Sharma opts for an annuity certain for 20 years and suppose he dies after 10 years even then his annuity will not stop and his nominees will receive annuity payments for the remaining 10 years. But if Mr Sharma dies after the guaranteed period of 20 years then the nominees will not get anything.

Life Annuity Increasing – In this option, the annuity amount keeps increasing year on year at a certainsimple rate of interest, say 3% or 5% and is payable to the annuitant as long as he is alive.
Joint Life Last Survivor Annuity – This annuity is payable to two annuitants jointly. After the death of the first, the annuity would be payable to the second annuitant till his or her lifetime.
Joint Life Last Survivor Annuity With Return Of Purchase Price – It is same as the joint life last survivor annuity as given above with an additional benefit of the purchase price being returned to the nominees on death of the last survivor.

Summary:

To wrap it up, immediate annuity plans do have various options to select from. Each option carries its own advantages and disadvantages, so it’s important to choose thoughtfully. Do remember that once you select an option you can’t change it later.
An important point to note is that annuities are taxable and subject to lower rates of return. This exposes them to inflation risks. Financial experts therefore advise not to depend completely on annuities as your only source of post retirement income.

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