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Annuity Plans Vs Fixed Deposit in India

Updated On Jan 08, 2024

Annuities are pension contracts that pay out regularly and are promoted by insurance firms as a desirable alternative for retirees. Fixed deposits (FDs) are a well-known type of investment, where the majority of risk-averse individuals prefer to invest. Both options are considered safe and risk-free investments where the investor receives the interest on its capital after maturity. However, some factors make them different from each other. Let us take a look at these differences. 

What is an Annuity Plan?

After making a lump-sum investment, an annuity policy allows you to receive regular payments for the rest of your life. Under the plan, the life insurance company invests your money and pays you the profits when you retire. So, if you're looking for a guaranteed source of income throughout your golden years, you can undoubtedly choose such a plan.

What is a Fixed Deposit (FD)?

Banks and other financial institutions such as non-banking financial institutions (NBFCs) and home financing firms (HFCs) provide fixed deposits as an investment option. Investors would deposit a big sum over some time in this scenario. As a result, investors would get a fixed rate of interest for the duration of the investment.

However, it must be noted that the interest rate on FDs is substantially higher than the interest rate on a standard savings account. Investors can withdraw their funds after the deposit's term. They can, however, reinvest their money for another tenure.

Difference between Annuity Plans And Fixed Deposits

Here are some points of difference between an annuity plan and a fixed deposit. 

  • Tenure - The fixed deposits take less time to reach maturity than annuity plans because of the general policy terms and regulations opted by the investor.  
  • Interest - Annuity plans have a higher rate of interest than fixed deposits. In an annuity plan, the interest rate depends on the returns of investments that are further dependent on market fluctuations. On the other hand, the interest rate on fixed deposits is compounded till maturity. 
  • Liquidity - There is a limit on liquidity in the case of fixed deposits since the whole amount is invested for a fixed tenure. On the other hand, the annuity plan has no limit on liquidity.
  • Withdrawal Penalty - Under fixed deposits, premature withdrawal might lead to penalties, whereas annuity plans offer flexibility in withdrawals. 
  • Taxation - Both plans include taxes when the amount is withdrawn; however, the terms and conditions are different. 

Take Away

Various financial institutions offer multiple investment schemes in the market. Fixed deposits and annuity plans are considered safe and low-risk investments among all the options and are opted by many people to create wealth. The points mentioned above can be considered to make a decision and choose between the two alternatives. 

Also Read:

Understanding PPF And Its Benefits

Are Mutual Funds A Good Choice Of Investment?


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

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