What is immediate annuity?
An immediate annuity is basically a risk-management tool designed to provide a steady income at regular intervals, most often to someone on the brink of retirement. An annuity plan works like an insurance product, where your insurance provider assures you a steady flow of monthly or annual income for the rest of your life against a lump-sum deposit of cash that you make to the insurance provider. While other kinds of annuities are funded over a period of time and only start providing monthly payments after months or years, an immediate annuity begins to pay out a pre-decided amount at regular intervals as soon as the annuity is purchased. Basically helps with retirement.
Five things to keep in mind about immediate annuities
- In most circumstances, this is an irreversible decision. Once you decide to purchase an immediate annuity, it usually cannot be undone. Therefore, it is imperative that you thoroughly evaluate the suitability of an immediate annuity for your requirements and circumstances. If you are just about to retire and want the stability of having a steady monthly income, then you can consider purchasing an immediate annuity. Do remember that it will be very difficult and expensive to back out of this purchase. Once locked in, you will not be able to spend this money on other insurance products or investment avenues. Make sure that an annuity plan is a beneficial option for you in the long-term.
- You can choose the kind of payout you want. Depending on your risk appetite and other factors, you can choose different kinds of immediate annuities. If you want to minimise risk and want a steady pay out, you should opt for a fixed annuity that will give you a guaranteed amount every month. If your risk appetite is slightly higher, you can opt for a variable payout. In a variable payout, either you get a minimum guaranteed amount every month with the rest of the money tied to the stock market, or the entire amount is linked to the performance of a stock market index. Finally, you can also opt for an inflation-indexed annuity, where the monthly payout starts low and increases as you go along, adjusted for inflation based on a pre-decided formula.
- The monthly payout you receive is contingent on the term you choose. When purchasing an immediate annuity, you will also select the term of the annuity. Typically, you’ll receive the largest payments if you opt for single lifetime coverage, which means that you’ll receive a guaranteed monthly payout regardless of how long you live -- this could be 2 years or 20 years. After that, the payments expire. However, if you want a guaranteed payment even in the event of your death, you can opt for a period-specific annuity, such as 10 years or 20 years, which will continue making payments to your beneficiaries for the specified period of time even if you don’t live that long. You can also opt for a joint life annuity, where you will receive guaranteed payments as long as you or your spouse remain alive. The monthly payment for this option is likely to be less since the insurance company is taking more risk.
- Annuities are not liquid investments. Typically, annuities cannot be encashed easily like, for instance, a fixed deposit can in case of a contingency. So you should carefully evaluate your liquidity needs if you’re planning to invest in an annuity. One option is to invest only a small portion of your savings into an annuity, and rest in more liquid assets.
- Annuities come with tax benefits. Under Section 80CCC of the Income Tax Act, the money you invest in a fund that pays you a periodical pension or annuity is tax deductible up to Rs 1.5 lakh combined with other exemptions under Section 80C. However, the income that you receive as annuity payments are taxable as per the applicable tax slab.
While choosing the right annuity plan for you, do your research well, compare the various products on offer, and pick a plan that suits your needs, circumstances, and savings goals the best. Keep a lookout for additional features and benefits -- some providers, for instance, offer inflation protection -- but remember that they all come with extra costs attached. Do also make sure you weigh the pros and cons of investing in an immediate annuity vis-á-vis other investment options, to make an informed choice that’s best for you and your family!