Immediate Annuity Vs Deferred Annuity

To have a steady source of income post-retirement, it is very important to do proper retirement planning. The key need for retiring in peace is to have an adequate financial backup to take care of daily expenses and any type of emergency expenses. Developing a strong retirement corpus is a long-term goal for every individual. To create a strong retirement corpus it is important to plan at an early stage and start investing in the retirement funds.

As per the recent survey on retirement made by the HSBC future, even though more than 70% of the working individual wants to live a comfortable life after retirement. Out of this percentage, only 1/3rd of people are saving for the retirement stage. The other 2/3rd of the individuals greatly depend on their children to take care of themselves when they get old. Thus, they don’t consider doing retirement planning.

The major concern for a retired individual is to have a regular income. An annuity is a financial product that gives regular income throughout the life of the individual. Nowadays, annuities are gaining popularity in the market as it offers guaranteed income and people are seeking a smarter way to manage the retirement funds. Further in this article, we have briefly discussed two different annuity options and which is a better option for retirement planning.

Immediate Annuity

The immediate annuity plan is for individuals who want to invest in the later stage of life. In an immediate annuity plan, the individual needs to pay a lump-sum amount to the insurer as a premium in one go, and in return, the insurance company starts making the monthly payment to the policyholder in form of annuities. It is a lucrative choice for people who are nearing their retirement age and have the savings to buy the annuity immediately.

Deferred Annuity

On contrary to the immediate annuity plan, in a deferred annuity plan, the policyholder needs to invest a prefixed premium on a monthly or yearly basis for a fixed tenure. After completion of the premium payment tenure of the policy, the accumulated fund is used to purchase an annuity. However, in a deferred annuity plan, the insured person can withdraw only 1/3rd of the accumulated fund, which is tax-free. The remaining 2/3rd of the corpus is used to purchase an annuity in order to provide a guaranteed regular income to the insured after retirement.

Know More: Types of Annuity

What you Should Focus on While Purchasing Annuity?

An annuity is a profitable financial product, which helps in the process of retirement planning. The annuity payout depends on whether an individual has opted for a variable or fixed income. If a person is 30 years old and wants to have a monthly income of Rs.1.lakh per month when he retires at the age of 58 then assuming the rate of return of 8% he will have to invest Rs.16,000 per month in a deferred annuity plan. Whereas, in an immediate annuity plan if the individual is at the age of 55 and investment Rs.50 lakh as a lump sum amount then he will receive around Rs.4 lakh as yearly pension till the time he is alive.

Tax Benefits of Purchasing an Annuity Plan

The money invested in an annuity is tax exempted. The annuitant can withdraw 25-33% of the annuity, which is exempted from tax. However, the income on the plan is taxable under the applicable rate of Income Tax. In the case of a senior citizen,  if the income is below the applicable tax slab limit then the tax is not applicable. However, if the senior citizen has taxable income then advance tax provisions will be applicable.

Charges Applicable on Annuity Plans

There are different charges applicable including the policy allocation charge, administration charge, and fund management charge on unit-linked pension plans. The charges applicable in the traditional pension plans are not disclosed in the same category the new pension system has the lowest applicable charge of 0.25%.

Wrapping it Up!

Your objective should not be to only invest in the retirement plan but to choose the right investment product, which can help you to create a strong financial cushion for secured retirement days. As per the experts, the best way to choose an annuity plan is to check the past track record of the annuity plan rather than getting carried away by the product feature of promotion.

Written By: PolicyBazaar - Updated: 11 January 2021
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