Retirement planning is one of the most important aspects of financial planning. The real planning begins once you figure out how much you need to save for retirement. There are several ways to contribute towards the retirement fund and annuities are one of them which help supplement the retirement income.
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Every person wants to have a continuous and stable flow of income after retirement. There are various factors that determine what should be the ideal coverage for retirement. The retirement fund of an individual should include the additional expenses that may occur due to any emergency in addition to the day to day usual expenses. With the increasing cost of medical expenses and the inflation rate in the country, it can become extremely difficult for the individual to sustain the retirement funds for the long-term without having a continuous flow of income. Thus, it is very important for an individual to have a proper retirement or annuity plan in place so that they can ensure financial security for the golden years of retirement.
While purchasing the annuity plans, certain aspects should be considered as they aren’t necessarily useful for everyone. This is because like any other insurance product it has its pros and cons, so you must consider its benefits and demerits before making an informed choice. Before getting into the details of the pros and cons of annuity, let’s first understand what is annuity.
An annuity is a contract between the insurance company and the insurance buyer, where the insurance buyer pays for the annuity as a lump-sum amount or as payments over-time. The individual can choose for either an immediate annuity plan or deferred annuity plan for investment as per their requirement. In an immediate annuity plan, the annuity payment starts immediately after paying a lump-sum to the insurer. On the other hand, in a deferred annuity plan, the insurance holder needs to pay the premium of the policy for a specific tenure and after completion of the premium payment tenure of the policy, the annuity is paid to the insured as a monthly payment or lump-sum amount.
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Most of the annuity plans provide a lifetime warranty of a regular income. The advantage of having a regular payout in form of a pension ensures that the finances of an individual do not suffer in the absence of the monthly income. This is one of the major advantages of annuity plans.
Annuity plans are specifically designed keeping in mind the various factors like growing medical expenses, inflation, etc. The skyrocketing inflation rate is a reality in our country and if it is not considered seriously it can have an adverse impact on the financial savings after retirement. An annuity plan can protect you against inflation by contradicting the consistent rise in prices with the sum assured that is accrued in the due course of time.
Most annuity plans offer the benefit of tax exemption under the applicable Section 80C and 10(10D) of the Income Tax Act and thus it adds to the overall accumulated fund while ensuring guaranteed payouts to the insurance holder.
One of the prominent features of a fixed annuity is that the value of the annuity is guaranteed to be the same or above the invested amount. The insurance holder can guarantee that they will receive back the amount they have invested in the annuity.
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Since the major focus of the annuity plan is the management of the retirement fund, it does not offer the advantage of partial or premature withdrawals. Moreover, if some plan offers the option of premature or partial withdrawals then it comes with strict regulations and rules. Thus, annuity plans are not flexible in nature. In case of any eventuality, the insured person cannot solely rely on the accumulated annuity corpus.
As compared to the other market-linked investment instruments, the payouts offered by annuity plans are rather limited or restricted. The fixed annuity plans offer fixed guaranteed returns, which is lower as compared to the investment returns offered by other market-linked instruments.
Management fees and sales commission are a common complaint about the annuity plans. Besides this, some of the annuity plans offer very high purchase cost. Thus, it is always advised that while purchasing an annuity plan make sure you do proper research and know exactly what you are paying for
Annuities are a way to supplement the income in your retirement. For some individual annuity can be a beneficial option as it provides assured regular income, tax benefit, and a potential death benefit. However, it is equally important for individuals to keep the above-mentioned cons in mind while purchasing an annuity. Thus, one should make an informed decision only when they know that it is the right move for them. Also, don’t be hesitant to reach out to a financial advisor to make the right decision.