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Understanding Annuity Plans

You work so hard to provide for yourself and the daily needs of your family. Each day is spent hurrying to office and there is no time for yourself. Finally…its retirement. Time to spend time catching up on hobbies you have postponed for years only for a single reason. No time...

You now have plenty of time but do you have the money to pursue these hobbies. A retired life meansno work no pay, and money has to be set aside to meet yours and spouse’s day to day expenses as well as any unexpected expenses that may come along. Have you made a retirement plan? Understand and then opt for an annuity plan.

What is an annuity plan?

An Annuity plan is a pension plan sold by Insurers (Life Insurance Companies) to meet your retirement needs. You make payment as a single lump sum (a single large amount) or a series of smaller payments over a period of time till a vesting age (your retirement age).

On maturity of the policy (say at your retirement age) you get a pension regularly. This may be monthly, half yearly (every 6 months) or yearly (every year).The pension paid is for as long as you live or for a fixed number of years.

What are the types of annuity plans?

You have animmediate annuity plan where you pay a lump sum (a single large amount) to the Insurer. The annuity plan begins the pension payments a month or a year after you have purchased this policy. This policy is also called a single premium immediate annuity plan. If you are not able to afford a single high lump sum you can take a deferred annuity plan. In a deferred annuity plan you have to collect sufficient money (Build a corpus) called the accumulation phase to purchase an annuity plan.

On maturity of the deferred annuity plan (vesting age/retirement age) you have the option of commutation (you take 1/3rd of the amount as a lump sum) and the remaining 2/3rd is invested in an annuity. You can also purchase an immediate annuity plan for the entire amount. Pension is paid to you after vesting age (retirement age) either monthly, half yearly or annually. This is the distribution phase.

If you (policy holder dies) within 5 years of taking this policy your nominee gets
Sum assured + guaranteed additions.
After 5 years
Sum assured + guaranteed additions +simple, revisionary or any additional bonus.

You can choose how you receive your pension payments

Fixed annuity
You get a fixed amount (your pension is fixed) for the time you receive the payments. This may be as long as you live or for a fixed time period. If you choose a fixed annuity plan your pension amount is fixed or increases too slowly to beat inflation. Inflation a general rise in price levels affects your pension payments (Your pension amounts have less value as inflation eats into it).

Variable annuity
If you opt for a variable annuity plan you get a choice to invest in conservative instruments (Government bonds and money market instruments) or more aggressive instruments such as mutual funds (small cap, mid cap, large cap or growth mutual funds) or a mix of both. These plans guarantee you a certain minimum amount. The pension returns vary depending on the stock markets. If you choose a variable annuity plan then your pension payments fluctuate with the stock market movements (equity).You could get a higher pension payment is some months (beats inflation) and lesser amounts in the other months. The uncertain returns are the risk you have to bear.

How does the Insurer make your pension payments?

You could choose a life annuity without return of purchase price for pension payments after your vesting age (retirement age) .This is also called a life annuity plan. You get pension payments as long as you (policy holder) is alive. After the policy holders death no money (pension) is paid to the nominee. The returns could be around 7-8% if you buy an annuity with such a payout (pension payment) at the age of around 40 years and as high as 11-12% % if you buy an annuity with such a payout (pension payment) at the age of around 60 years. You can take a life annuity plan if you are single with no dependents.

In a life annuity with return of purchase price you get pension payments for as long as you (policyholder) is alive. After the policyholders death the nominee gets back the purchase price of the annuity which is (sum assured + guaranteed additions+ accrued bonus). Annuity payments increases at a fixed rate of 3-5% each year. In an annuity guaranteed for certain periods you get pension payments for 5, 10 or 15 years depending on the policy irresepective of whether you survive this term or not. If you (policy holder) die within the term the pension is paid to your nominee. If you the policyholder survive beyond this term the pension is paid for as long as you (policyholder) are alive.

Joint life last survivor annuity with 50% pension for spouse where on the death of you (the policyholder) your spouse gets 50% of the pension amounts you used to get until her death.

Joint life last survivor annuity with 100% pension for spouse where on the death of you (the policyholder) your spouse gets 100% of the pension amounts you used to get until her death.

How is an annuity plan taxed?

You get a deduction under Section 80C and Section 80 CCC combined up to INR 1.5 Lakhs per year from your taxable salary on the payment made towards the annuity policy. The 1/3rd of the amount you get as a lump sum in a deferred annuity plan is tax free under Section 10(10A). The annuity amount (pension you receive) from your immediate or deferred annuity after vesting (retirement age) is added to your taxable salary and taxed as per the income tax slab you fall under. So understand annuity plans and enjoy your retirement life.

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