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Role of Annuity in Retirement Planning

Every individual looks forward to spending their life after retirement with peace and free from the stress of finances. An annuity is a great way to make that happen. If you are new to the world of retirement planning or the term ‘annuity’, this post is definitely something you cannot afford to miss. So, read along. 

What is Annuity?

An annuity is basically a contract between an individual and life insurance company. It is a promise that the insurance company will provide the buyer with a steady income in the future. To attain annuity, the investor pays a lump sum amount to the life insurance company, which is then invested to pay back the returns generated from it. Annuity can be utilized for generating a steady income after retirement. It is one of the key reasons that most people know annuity as an insurance form and not an investment avenue. 

Types of Annuities

The types of annuities are:

1. Deferred Annuity - Has a specific interval between the premium payments and annuity payouts.  
2. Immediate Annuity - Requires the buyer to pay a lump sum amount in the form of premium to receive immediate payouts.
3. Fixed Annuity - The most popular annuity type, fixed annuity, gives payouts that remain constant over the entire tenure. Specific payouts are guaranteed under this type.
4. Variable Annuity - The payouts vary based on the performance of the benchmark or the index up to which the investment is mapped.

How Does Annuity Work? 

The investor chooses an annuity plan and makes a lump sum investment in it. Based on the annuity plan specifics, the investor receives payments on a series of dates. It must be noted that the investor can choose to receive the payments on a monthly, quarterly, or yearly basis. In addition, the income payout given to the investor depends on various factors including the annuity tenure. The investor can choose a guaranteed payout (fixed annuity) or payout dependent on the performance of an annuity plan’s underlying investments (variable annuity).

Things to Keep in Mind Before Buying Annuity

Here are a few things you must be aware of before buying an annuity:

  • Annuities are different from mutual funds.
  • You can build a bigger corpus if you start investing early in annuities.
  • Annuities come with related commission charges and early withdrawal/surrender charges
  • For an annuity plan, you have to pay tax at the time of withdrawal.

That said, what are you waiting for? Go ahead and buy an annuity if you want to secure your life post retirement. You can buy an annuity from any of the insurance companies in India. Remember, you can also buy an annuity plan from asset management companies renowned for managing the National Pension Scheme (NPS).   

Must read: Top Questions To Ask When Buying Retirement Insurance Plans

How to Get Your Retirement Planning on Track?


Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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