The primary concern most retirees are plagued with as they transition from active work to a retired lifestyle is the change in income patterns. Although personal assets, employment benefits and savings can help them maintain their livelihood and meet their financial obligations, having an income replacement sum every month eases the anxiety around the drastic change. This is where an annuity plan comes in.
An annuity plan and its functional benefits can be instrumental in helping you establish a thriving economic future for yourself and those dependent. An annuity pension plan is an instrument for financial stability and balance which can be availed by those looking for the best retirement solutions and guaranteed regular payments.
Therefore, let us take a closer look at the workings of an annuity pension plan and how it benefits your finances for the future.
What is Annuity Plan?
An annuity plan is an investment instrument or a contract between a policyholder and an insurance provider in which the policyholder must pay a lump-sum payment or pay in instalments in order to receive regular annuity income after retirement. The annuities might be paid either immediately after the lump-sum payment or after the specific tenure has ended. The workings of a retirement annuity plan are dictated by the retiree, as it is a highly flexible and customisable retirement scheme meant to make your future stress free.
In the absence of a stable income after retirement, one may have to rely on their savings or assets to meet their financial commitments. In such situations, some investors may choose to purchase an annuity plan from an insurance company or other financial institution because these assets may not be adequate to fulfil their financial requirements.
As a result, the answer to what is annuity plan is that it is an income replacement investment option that is designed to provide people with a steady cash flow during their retirement years while also reducing the risk of their assets and savings being expended. Now that we have understood what is annuity plan, it’s important to understand the phases that are included within the operation of such a plan after purchasing an annuity policy, as well as the many types of annuities available.
Types of Annuity Plans in India
When discussing and choosing the best annuity plan, it’s crucial to know that it allows for user-specific needs based on their financial needs. Various components of an annuity can be customised to match the investor’s specific requirements. There are six different types of retirement annuity plans that a prospective investor can avail for their retirement needs:
- Immediate Annuity Scheme: As the name implies, the Immediate Annuity plan is a type of annuity that is paid out to the insured right away. It does not offer an accumulating period in this sort of annuity plan. The advantages of an instant retirement annuity plan begin to accrue as soon as the vesting age is reached. In an immediate annuity plan, the policyholder pays a lump-sum amount to the insurer, and annuity payments begin immediately for a lifetime of the insured or for tenure set by the same.
- Deferred Annuity Scheme This retirement annuity plan is a pension plan that provides annuity once the accumulating period has elapsed. There are two types of deferred annuity plans: one with a fixed rate of return and one with a variable rate of return.
- Lumpsum Annuity Scheme: A lumpsum annuity pension plan offers the option of receiving a lump sum payment. Such a one-time payment is usually discretionary and only available for a limited period. It is important to note that the entire retirement sum accumulated cannot be withdrawn in a single lump sum.
- Periodic Annuity Scheme: This annuity scheme pays cash to the annuitant on a regular basis. This is more akin to a pension plan, in which the intervals might be based on every month. Furthermore, payments might be made in stages towards the conclusion of the 5th, 10th, and 15th years, regardless of whether premium payments had been made previously or not.
- Variable Annuity Scheme A market-linked retirement annuity plan, variable annuity schemes benefit from the speculations made by the dealing organisation on plans that the individual has invested in. Payments will be larger if the entity in charge of the plan achieves excellent results, but annuity payments will be lower. Since these plans are market-connected, they cannot guarantee success, making them a similarly risky recommendation for retired investors.
- Fixed Annuity Scheme: This retirement annuity scheme assures that the income payouts will be steady over the payment period. Compared to the variable annuity scheme, the fixed retirement annuity plan is moderately conservative and safe as it invests in fixed-pay instruments. As a result, the principal sum invested may not change much over the annuity scheme’s accumulation phase. A fixed annuity scheme is suitable as a benefits payment because it ensures that the person is paid regularly during their post-retirement years.
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Key Takeaways
- An annuity is a lifelong income payment of a fixed amount of money, and the annuity rate is the key component that determines how much money you get each year.
- Since annuity schemes are long-term plans, it signifies that the rate given will be greater than current rates. Therefore it is always beneficial to start as early as possible.
- Annuities can be constructed into a variety of products, giving investors a lot of options.
- Immediate and deferred annuities are two types of these products, and they can be fixed or variable in type.
- The accumulation phase of an annuity policy is one in which the investors fund the product with a lump deposit or recurrent payments.
- After the annuitization period commences, the retiree begins receiving payments for a designated period of time or the remainder of their lives.
What are the Benefits of an Annuity Plan?
The best annuity plan is key to receiving guaranteed regular payments due to the various options and customisable plans they offer within their functional structure. As a result, annuities are best suited for customers who desire to supplement their retirement income or convert a large lump sum payment into a regular stream of cash flows over time. These characteristics make it a safe investment. If you look into annuity scheme benefits you will see the following features across the board:
• Guaranteed income replacement payouts for life
• Customisable as per the investor’s financial requirements
• It may come with probate and creditor protection.
Documents Required for Purchasing Annuity Plan
Here is a list of documents you would require to purchase an annuity scheme:
Age:
Any one of the following:
- Birth certificate
- High school mark sheet
- Driving licence
- Passport
ID Proof:
Any one of the following:
- Driving licence
- PAN card
- Aadhar card
- Voter ID card
- Passport
Address Proof:
Any one of the following:
- Utility bills
- Ration card
- Aadhar card
- Voter ID card
- Passport
- Driving licence
Income Proof:
- Bank statement
- Salary slip
- Copy of ITR Return
Factors to Consider Before Purchasing an Annuity Plan
Now that we know what is annuity plan, here is a list of factors you must consider before buying the best annuity plan:
Years Left in Retirement:
Your choice of annuity scheme should depend significantly on your retirement. If you are young, and years away from retirement, you can consider buying deferred annuity schemes. In this type of annuity scheme, the payout starts after a gap of a few years; but the premium payment commences after the plan is purchased. In case, you are close to your retirement years, immediate annuity schemes are recommended.
Liquidity:
Even though most annuity schemes offer full withdrawal only after retirement, it’s better to look for those that allow premature partial withdrawal. This can prove to be beneficial for you if you witness an unforeseen event in your life; you can withdraw from the fund when the time calls.
Look for a Better Provider:
When you are investing in an annuity scheme, safety and returns play a significant role. After safety, returns play a vital role. As annuity products have a longer lifetime, some companies are hesitant when it comes to providing returns. They retain a pivotal part of earnings as reserves to meet contingencies instead of providing the investor with the liberty to claim returns. If you are in the second innings of your life, it is not a good option for you. That’s why it’s essential to choose a reliable provider that offers you greater flexibility. You can go through the reviews, compare numerous annuity schemes read news about the company, and go through the solvency ratio to make a wiser choice.
Documents Required for Claim Process:
The documents required for claiming your annuity would differ according to the company. However, most companies require you to submit a claim form available on their website. This claim form along with a PAN card, ID proof would be required. If you are filing a death claim, then a death certificate would be required.
You can contact your annuity company to get a detailed list of the documents.
Advantages and Limitations of an Annuity Plan:
Now that we have explained what is annuity plan, let’s cover something crucial. Here are a set of advantages and limitations of an annuity scheme Go through them to see if annuity schemes are the right choice for you:
Advantages:
Protection Against Inflation:
Inflation has been the enemy for those who have experienced financial struggles. Much to the relief of these sets of people, the best annuity plan takes into account the effects of inflation. They are designed to offer a sum assured that can contradict the steady rise in prices.
Ensures Inflow of Income:
As much as retirement years are the golden years of life, what doesn’t change the downside of it is that you are devoid of a steady flow of income. Income replacement is essential, especially after you retire. With the best annuity plans, you get an assured regular flow of income to meet your expenses and live your retirement life without any worries.
You can Get Tax Benefits:
Under Section 80C and 10 (10D) of the Income Tax Act, you can get tax benefits up to the limit of INR 1,50,000.
Disadvantages:
Inflexibility:
Annuity plans are highly inflexible in nature as they come with numerous withdrawal restrictions. Most annuity schemes in India refrain you from taking complete withdrawals before your retirement. Partial withdrawals are only allowed after a few years and under exceptional cases.
Low Returns on Investment
Annuity plans are designed to offer you a steady flow of income after retirement, not to grow your money. Thus, annuity scheme won’t be ideal for you if you are looking for high returns. You can earn no or little returns upon investing in the best annuity plans.
Conclusion:
The best way to utilise the endless benefits offered by the best annuity plan money can buy is to avail the various payout methods offered. The goal of the best annuity plan will always be to replace the income gap and make up for it through recurrent payments which can support your lifestyle post-requirement and help you stay carefree and relaxed at a time when you deserve it the most.
FAQs
An annuity scheme is an investment instrument or a contract between a policyholder and an insurance provider in which the policyholder must pay a lump-sum payment or pay in instalments in order to receive regular annuity income after retirement.
There are many options on the investment market that can help you avail the best annuity plan for the ideal retirement lifestyle. The best annuity plan will be one that yields profitable returns, has regular payments and does not fail even when the stock market does.
This annuity pension plan is a pension plan that provides annuity once the accumulating period has elapsed. There are two types of deferred annuity plans: one with a fixed rate of return and one with a variable rate of return.
Withdrawal of funds from the annuity pension plan can happen under specific conditions as stipulated by the terms of the annuity pension plan. For cases like critical illness, or untimely demise of the policyholder, one can avail the investment amount or a portion of the same from the insurers.
A lumpsum annuity pension plan offers the option of receiving a lump sum payment. Such a one-time payment is usually discretionary and only available for a limited period. It is important to note that the entire retirement sum accumulated cannot be withdrawn in a single lump sum.
ICICI Prudential Immediate Annuity Scheme, India First Immediate Annuity Plan and Kotak Lifetime Income plan are some of the best annuity plans in India.
Investing in your 40s is the best time to invest in annuity plans. However, it depends on your financial goals as well.
The downsides of investing in annuity schemes are low-returns and withdrawal limitations that annuity schemes come with.
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