An annuity is an insurance plan that involves an individual making a lump-sum payment or a series of payments to an insurance company. Annuities are sometimes called as “Reverse Life Insurance” In return, the insurance company commits to providing regular payments back to the individual. These payments can begin immediately or at a predetermined future date. Annuities are commonly used as a retirement planning tool, offering a steady income stream for a specified period or the remainder of the annuitant’s life. 

Benefits of Annuities

  • Steady Income: Annuities offer a predictable income stream, helping individuals maintain their standard of living during retirement.
  • Longevity Protection: Annuities protect against outliving your savings (longevity risk) by providing income for life or a specified period.
  • Tax Advantages: Annuities are eligible for tax benefits as per existing law, I,e . the Income Tax Act, 1961.
  • Customizable Options: Annuities come with various options such as fixed or variable payouts, joint or single-life payouts, and riders for inflation protection or beneficiary benefits.

Framework of Pension System

Most annuity contracts have an accumulation phase and a liquidation phase. During the accumulation phase, capital is builds up; this capital is disbursed during the liquidation phase. In general pension plans and annuity plans used as inter changeable words in Indian context. There are various types of annuities, including immediate and deferred, fixed and variable, each with distinct features catering to different financial preferences and needs. 

Some widely available annuity products in the Indian market are:

  • Immediate Annuity

This type of annuity starts paying out immediately after a lump sum investment. It is suitable for those who are at or near retirement age and wish to start receiving income right away.

  • Deferred Annuity

With a deferred annuity, payments begin at a future date. Individuals can contribute to this annuity over time, allowing the investment to grow before starting the payout phase. This is ideal for younger individuals who are planning for their retirement.

  • Variable Annuity 

Unlike fixed annuities, variable annuities offer a payout that varies based on the performance of the investment options chosen by the annuitant. This type is more suitable for individuals who are willing to take on more risk for the possibility of higher returns.

  • Annuity Certain

An “Annuity Certain” or “Certain Annuity” is a type of annuity that guarantees payments to the annuitant for a specific number of years, regardless of how long they live. This predetermined period is referred to as the “certain period” or “guarantee period”. If the annuitant passes away before the certain period ends, the remaining payments are usually made to a designated beneficiary or the annuitant’s estate.

New Pension Scheme (NPS)

With the introduction of NPS which was made mandatory for government employees joining services from 2004. This scheme is for government employees is a defined contribution plan with co-contribution from the government. The central and state governments (except two) are on the NPS. It was opened to all citizens in 2009 irrespective of their employment status. In other words, anyone in the age group of 18-70 years could open an NPS account. Subsequently, NPS was opened to the corporate sector in 2011. So, corporates have a choice to either go with EPFO or NPS for their employees.

NPS is designed as a Defined Contribution (DC) system of individual pension accounts jointly funded by the employer and employee; each of whom is required to contribute 10 per cent of gross salary. Members can select a pension fund manager and allocate funds to an investment scheme of their choice. A key feature of the NPS is that withdrawals are not normally permitted until the age of 60. At retirement, accumulated balances are divided into two components. At least 40 per cent of the account balance has to be mandatorily used for purchasing annuities; the remaining can be withdrawn as a lumpsum amount. 

Annuity Market in India

The annuity market in India, though relatively small compared to other segments, has been experiencing a trend of growth. This is attributed to several factors, including the aging population, increased life expectancy, and the rising awareness of the need for retirement planning. The introduction of pension reforms and the expansion of the private insurance sector have also contributed to the growth of annuities.

Key players in the Indian life insurance market include the Life Insurance Corporation of India, SBI Life Insurance Company Ltd, HDFC Standard Life Insurance, ICICI Prudential Life Insurance, and Max Life Insurance, all of which offer annuity products as part of their portfolio.

Each type of annuity comes with its own set of benefits and considerations, tailored to different stages of life and financial objectives. 

Some key terms associated with annuity plans:

  1. Accumulation Phase: An accumulation period (or accumulation phase) is the segment of time in which contributions to an investment are made regularly, or premiums are paid on an insurance product, such as an annuity intended to be used for their retirement purpose. 
  2. Annuitization phase: The second phase, then, the process of annuitization is the means through which an annuity is converted from and investment into periodic income payments. The annuitization phase, then, is the period of time during which the periodic payments are made. or the annuitization period may be a specified period of time, which includes the remainder of the annuitant’s life
  3. Vesting Date: Vesting date is the date from which the annuity holder starts receiving the policy benefits of a regular stream of income. This date marks the end of the accumulation phase and the start of the annuitization phase of the annuity plan
  4. Life Annuity: This guarantees payments for the rest of the of an individual life, regardless of how long they live. This can help mitigate the risk of outliving their savings.
  5. Joint and survivor annuity: Joint annuity plans are insurance plans which are made for two annuitants wherein regular payments are provided till the death of both the beneficiaries

For those interested in exploring this further, insurancepe provides valuable insights into choosing the right annuity for your financial future. The key to a comfortable retirement is informed decision-making.