All About Annuities

What are Annuities, and should you buy them for your retirement? Our expert weighs in.

Annuity is the most preferred debt instrument option for the retirement portfolio to receive stable income. However, annuity pay-outs are taxable. Many people sign up for annuities because it gives you income forever, even until your partner dies. Sounds too good to be true, right?

What are annuities and how do they work?

Annuities are products that offer you a fixed payment in return for a one-time lump sum payment or recurring payments made from your end. Broadly speaking, annuities come in two flavours: 

Immediate annuity: The monthly payout will start immediately.

Deferred annuity: The payment of the annuity is deferred until a later date.

Let’s look at how they work and whether it is a good option to consider for your retirement: 

Features & Benefits

· One-time purchase of annuity policy, and you can receive pension/annuity - monthly/ quarterly/ semi-annually/annually until lifetime. 

·  You have the option to choose between different categories of annuity schemes. It can be immediate/deferred, single/ joint life, with/without return of purchase price.

·  Choosing an option of joint life annuity benefits your spouse to receive a pension until his/her lifetime. 

·  Return of purchase price option would mean that your children would receive the lump sum amount upon both your lifetimes.  

The Not So Good

·  Annuity is taxable- The annuity you receive under the plan becomes an income when calculating tax. Therefore, it becomes part of taxable income and attracts tax according to the income tax slab. 

·  Annuity is not inflation adjusted- you may have to shell out more from your pocket as you age, whereas an annuity is a fixed-income instrument. 

· On a general note - XIRR for a post-tax annuity plan is around 3.5-4 per cent - similar to FD 

· The purchase price is locked in and not withdrawable. 

Alternatives to consider

1)    Corporate bonds

2)    RBI Bonds 

3)    Pradhan Mantri Vaya Vandhana Yojana – PMVVY 

4)    Senior citizen saving schemes- SCSS 

5)    Debt mutual funds

Should you buy them?

The returns offered are comparatively lesser than a tax-saving bond or even a senior citizen FD. A wealth creation portfolio, an equity portfolio and a debt mutual fund SWP can be good alternatives. If you want to consider an annuity, it can be part of your debt portfolio and up to 20 per cent of the overall portfolio. Many people look into an annuity product without properly considering the implications of the lower return. Do consult your financial advisor before investing for retirement to get a better understanding of how these products work. 

Disclaimer: Consulting a professional can always help you to identify the right avenues for investments during the golden years.