- 14-Sep-2025
- Elder & Estate Planning law
An annuity is a financial product that provides a steady income stream over a specified period or for the lifetime of the annuitant. In retirement planning, annuities are often used as a means to ensure a predictable and stable income during retirement. By converting a lump sum of money into regular payments, annuities can help retirees maintain their financial security and protect against the risk of outliving their savings (longevity risk). There are various types of annuities, each with different features and benefits, allowing individuals to tailor them according to their retirement needs.
An annuity is a contract between an individual and an insurance company or a financial institution in which the individual makes a lump sum payment or a series of payments in exchange for regular, periodic payments over time. This regular income can begin immediately or at some point in the future, depending on the type of annuity purchased.
Fixed annuities provide a guaranteed, predictable income for the length of the contract. The amount of income is fixed and does not change over time, making it ideal for retirees who need a stable income stream without worrying about market fluctuations.
Example: If you invest ₹20,00,000 in a fixed annuity, the insurance company will pay you a fixed amount of ₹15,000 monthly for the next 20 years.
In variable annuities, the payout varies based on the performance of underlying investment options, such as mutual funds. This allows for the potential for higher returns but comes with the risk of lower payouts if the investments perform poorly.
Example: If you invest ₹20,00,000 in a variable annuity, the payout might be ₹15,000 per month, but if the underlying investments perform well, the payout could increase.
An immediate annuity begins payouts right after the lump sum payment is made. This is useful for retirees who need immediate income and do not want to wait for years to start receiving payments.
Example: If you are 65 and purchase an immediate annuity with ₹10,00,000, you could begin receiving monthly payments immediately, typically for the rest of your life.
Deferred annuities delay payments until a future date, allowing the invested amount to grow before starting income payments. This type of annuity is ideal for those who want to build up their retirement savings before they begin taking regular payments.
Example: If you purchase a deferred annuity at 50, you will not begin receiving payments until you reach 65, allowing your investment to grow during the deferral period.
One of the biggest advantages of annuities is the guaranteed income. With a lifetime annuity, you can ensure that you won’t outlive your money, as the insurer continues to make payments to you no matter how long you live.
Annuities help mitigate the risk of outliving your savings, especially for retirees who have no other guaranteed source of income like a pension. Since annuities provide regular payments for a set time or lifetime, they help retirees maintain their financial security.
The money you invest in an annuity grows tax-deferred. You do not pay taxes on the income until you begin receiving the payments, which can help grow your retirement savings more efficiently.
Annuities provide a hands-off investment option for retirees who may not have the expertise or the time to manage a portfolio of investments. Once you purchase the annuity, there is no need for ongoing management.
Annuities come with various customization options. You can add features like inflation protection, which increases your payments over time to keep up with inflation, or a death benefit, ensuring your beneficiaries receive a payout if you pass away early.
Fixed annuities may not keep up with inflation, meaning that the purchasing power of your annuity payments could decrease over time. For this reason, inflation-adjusted annuities or variable annuities are better suited for some individuals.
Certain types of annuities, especially variable annuities, may come with high fees and charges. These fees can eat into the returns you earn, so it's essential to thoroughly understand the terms before purchasing an annuity.
Once you purchase an annuity, the money is typically locked in for a period of time. If you need to access your funds before the payout begins, you may face significant penalties or surrender charges.
Annuities are backed by the insurance company, and there is a risk that the issuer could face financial difficulties. This is particularly important for long-term annuities, as the insurer must remain financially stable over the long haul.
Annuity Purchase for Retirement
Ravi, a 60-year-old retiree, decides to buy a fixed immediate annuity with ₹30,00,000 of his savings. The insurance company offers him ₹20,000 per month for life, starting immediately. Ravi will receive ₹20,000 every month as guaranteed income for the rest of his life. In the event that he lives longer than expected, the annuity will continue paying out for as long as he lives, ensuring he doesn't run out of money in retirement.
Annuities can be a valuable tool in retirement planning, offering retirees a steady income stream and protection against the risk of outliving their savings. The right type of annuity can help you maintain your lifestyle and financial security during retirement. However, it's important to carefully evaluate the different types of annuities, their costs, and the specific benefits they offer to ensure they align with your retirement goals. Consulting a financial advisor can help you determine whether an annuity is the right choice for your retirement strategy.
Answer By Law4u Team
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