Ever wondered what is annuity? Here is a primer on everything that you want to know about this term.
Updated on: 18-Aug-2022
'Annuity' means a fixed sum of money that is paid out to the purchaser every year in return for a lump sum, usually for as long as the purchaser lives. An annuity is typically priced on the basis of product features, longevity and interest rates. Annuities in India are typically 'deferred annuities' or annuities that are purchased on the maturity of a pension plan or NPS scheme. However, immediate annuities that begin paying out immediately after purchase are also available.
Features of annuity
Suitability and alternatives
Investment objective and risks
The main objective of an annuity is to provide income in retirement. An annuity can be purchased on retirement or earlier. It can be structured to provide fixed as well as variable income, with or without an insurance cover. There are several options within annuities, which address the specific needs of individuals seeking a defined income source in retirement.
Capital and inflation protection
The annuity payout is fixed and guaranteed as per the terms of the policy through the tenure of the annuity. An annuity is not inflation protected, as the payout is fixed and does not match the inflation-adjusted cost of living. However, certain annuity variants offer increasing annuity payouts, which attempt to match inflation.
Guarantees
The annuity is assured and guaranteed according to the terms and conditions of the annuity contract.
Liquidity
Annuities typically do not have exit options. Certain types of annuity contracts may offer some level of liquidity.
Tax benefits
In the accumulation phase of a deferred annuity plan, the contributions qualify for tax deductions under Section 80CCC, with a limit of Rs 1.5 lakh in a financial year. At the time of vesting, up to one-third of the corpus can be withdrawn tax-free under Section 10(10A), with the remaining paid out as an annuity, which is treated as income and taxed accordingly.
The five payout options offered in an annuity are as follows:
Where to buy annuity
All life insurers offer deferred annuities, while many offer immediate annuities.
How to buy
Once you have evaluated the amount of annuity needed, look at the available options and fill the appropriate proposal form. You will need to provide the following:
How to manage the policy
Other information
Recovering investments from annuity plans
Everything you need to know about annuity plans
