Systematic Withdrawal Plan vs Annuity

What is a Systematic Withdrawal Plan?

A Systematic Withdrawal Plan (SWP) in mutual funds is a way of earning regular income after your retirement. You can think of it as a monthly SIP, the only difference being that you are the one who receives it.

• It helps you withdraw a portion of your investment in a monthly, quarterly, or annual manner.
• The rest of your money keeps growing in the mutual funds while you receive a regular income.

1. How SWP Works?

   A Systematic Withdrawal Plan works in the following way:

   • You invest a lump sum amount in a mutual fund and choose a withdrawal amount and date.
   • On your chosen withdrawal date, your fund manager/AMC sells the required units from your mutual fund to provide the withdrawal amount set by you.
   • The rest of your investment continues to grow in the mutual fund scheme.

2. What is an Annuity?

   An annuity plan in insurance is an investment product where you pay a lump sum or a series of premiums and the insurer pays you a fixed income at regular intervals.

   • Through an annuity plan, you can receive your income for a set period or for the rest of your life.
   • Unlike SWP, you generally don’t earn a return on your investment and your income stays fixed, except in cases where you choose variable annuities.

   There are different types of annuities you can choose from:

   • Immediate Annuities: You can start getting your income right away
   • Deferred Annuities: You receive your annuities at a later age, usually after retirement, like the NPS scheme.

Comparison of SWP vs Annuity

A detailed comparison between the Systematic Withdrawal Plan and the Annuity on various factors is given in the table below:

Which is Better: Annuity or SWP?

Let’s understand the Annuity vs SWP debate with the help of an example.

Suppose we take a corpus of ₹50 lakh.

1. If you choose Annuity:

   At an annuity rate of around 7% for a 60-year-old choosing immediate annuities, a ₹50 lakh corpus would convert to roughly ₹3.5 lakh annually or about 29,000 per month, before taxes.

2. If you choose Systematic Withdrawal Plan:

   Suppose you invest the same ₹50 lakh corpus in a SWP in a mutual fund with an expected return of 9%, a monthly withdrawal amount of ₹30,000, and a time period of 20 years, while the rest of your money grows.

   • Using the SWP calculator, your amount withdrawn will be ₹72 lakh, most of which will be your principal amount.
   • You will be taxed only on the earned interest portion.
   • Your corpus may shrink or grow based on the market conditions.

   There is no “single” best plan; the choice varies depending on the goals and risk appetite as explained below:

   Choose SWP	Choose Annuity
   Investments continue growing	Guaranteed and predictable income
   Need flexibility and liquidity	Don't want to manage investments
   You want to leave wealth to your heirs	Ensuring income for life
   Comfortable with market fluctuations	Risk-averse and prioritise income certainty over growth

Tax Treatment for Systematic Withdrawal Plan and Annuity

Below is the tax treatment of an SWP and an annuity plan:

• Annuity payouts are fully taxable under your applicable income tax slab.
• The interests earned in an SWP are taxed 12.5% for long-term gains and 20% for short-term gains. The principal is not taxed.
• While an SWP offers significant tax benefits, it also carries market-related risks.

Can I Invest in Both?

One of the best ways to plan for your retirement is to mix both approaches: a portion in an annuity and the rest in an SWP. This approach covers you in your old age in a balanced way.

• Use a small portion of your fund to invest in an annuity to fund your monthly expenses like rent, groceries, and utilities.
• Use another part of your money to invest in a Systematic Withdrawal Plan in a hybrid fund, which will fund your bigger goals like travel and other bigger expenses.
• Keep some liquidity for 1-2 years to fund any emergency requirements.