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What Are Annuity Plans?

Annuity plans are long-term contracts with insurance companies or pension providers that offer you regular payments (monthly, quarterly, yearly) after a certain date.

 

  • In retirement planning, they serve as a bridge between accumulations (savings) and guaranteed income.

  • You either pay a lump sum or contribute over time. Later, these payments (called annuities) begin by providing you with a steady cash flow. Annuity schemes reduce the risk of outliving your savings, which is especially important after your salary stops.

  • Insurers provide annuity plans where you can defer the payout or start it immediately. The returns are not market-linked (in most annuity plans), making them more predictable and safer. You can opt for market-linked annuity options if you prefer. 

  • The payout depends on your age, the amount invested, the annuity rate, life expectancy, and the option you choose (like single life or joint life).

  • Annuity plans convert your retirement corpus into a regular pension. It makes them a key part of retirement planning for those who prefer security and want a predictable source of income.
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Now that you know what an annuity is, let’s see how they work. 

How Does Annuity Work?


An annuity is a long-term financial arrangement that ensures you receive a guaranteed stream of income during your retirement years. 

 

An annuity plan has two stages: 

Investment Phase (Accumulation Period)

You buy an annuity plan and invest a lump sum amount or make periodic premium payments to an insurance company. The money is then used to build your retirement corpus over time.

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Payout Phase (Vesting or Annuity Period)

 

After the accumulation phase ends, or immediately if you choose an immediate annuity plan, the insurer starts paying you a fixed amount at regular intervals. The payments can be made monthly, quarterly, half-yearly, or annually, depending on what you select.

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Other aspects of annuity plans are explained as follows: 

Annuity Options

 
  • You can choose between different types of annuities, such as fixed, variable, deferred, or increasing. Fixed annuities guarantee a predetermined payout that does not change with market fluctuations. They are ideal for those who prefer a stable income. In contrast, variable annuities link returns to market performance, which may result in higher or lower income (depending on fund performance).
  • In immediate annuities, the payouts start right away after you have made your investment. On the other hand, in deferred annuity plans, the payouts start a while (usually a few years) after you have completed the premium payment. 
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Payout Amount

  • The payout amount is calculated on the basis of your investment value, age, gender, the type of annuity plans chosen, and prevailing annuity rates. Making a higher investment or delaying the payouts may result in higher periodic income.

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Duration and Beneficiary

  • You may opt for payments for life (lifetime annuity) or a specific period (annuity certain). Joint life annuity plans ensure continued payments to your spouse after your demise.

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Return of Purchase Price (Optional feature)

  • In some annuity plans, the initial investment (purchase price) is returned to the nominee after the annuitant’s demise.

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Features of Annuity Plans

Annuity plans combine security, flexibility, and long-term stability to ensure that your financial needs are met throughout your post-employment years. 
 

Below are some of the key features of annuity plans:

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Guaranteed Income

 
  • Annuities offer fixed, regular payments for a specific period or for life. It ensures financial stability even after you stop earning a salary.
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Flexible Payout Options

  • You can choose how frequently you want to receive payouts—monthly, quarterly, half-yearly, or yearly—depending on your needs.

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Choice of Tenure

  • Payments can be set for a defined term (such as 10 or 20 years) or for your entire lifetime.

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Variety of Plan Types

  • You can select from multiple types of annuities, including fixed annuities, variable annuities, immediate, or deferred options, on the basis of your goals.

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Joint or Single Life Option

  • You can buy an annuity plan for yourself alone or include your spouse under a joint life annuity, which continues payments to the survivor.

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Return of Purchase Price

  • Certain annuity plans refund the invested amount (purchase price) to your nominee after your passing.

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Inflation Protection

  • Some annuities offer increasing payouts each year to help offset inflation.
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Low Market Risk

 
  • Fixed annuities are usually low in risk and are not directly exposed to market fluctuations. It ensures the safety of your capital and provides predictable returns. 

  • Overall, annuity plans provide peace of mind by ensuring a steady and predictable income stream during retirement.
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Benefits of Annuity Plans

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Guaranteed Regular Income

The biggest advantage of an annuity retirement plan is the assurance of a steady income for life or for a chosen period. What this means is that you can comfortably manage your expenses after retirement.

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Protection Against Longevity Risk

Annuity plans ensure that you do not outlive your savings. Payments continue for as long as you live, depending on the plan you choose.

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Financial Security

With assured payouts, you can plan your monthly budget without worrying about market fluctuations or economic changes. Certain annuity plans even provide increasing payouts each year. It can help you counter the effect of inflation and maintain your purchasing power.

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Flexible Options

You can choose between different types of annuity plans in India – immediate or deferred, single life or joint life—to suit your needs.

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Return of Purchase Price

If you opt for the return of purchase price option, the invested corpus (purchase price) gets returned to your nominee upon your demise. It can ensure your family’s financial protection even in your absence.

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Tax Benefits**

The premiums paid towards an annuity pension plan are eligible for deductions up to ₹1.5 lakhs under Section 80CCC. In addition, your investment grows tax-deferred until you start receiving payouts, which can help your savings compound faster.

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No Market Risk

Since (fixed) annuities are not tied to the stock market, they provide stable income even during volatile market conditions.

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Types of Annuity Plans

To ensure accurate annuity planning, it is important to know the different types of options you can avail of. 
 

The various types of annuity plans can be categorised and sub-categorised as follows:

1. Based on Payout Initiation Time

a. Deferred Annuity

In a deferred annuity, you invest money now, but the annuity payments start after a chosen deferment period. During this phase, your investment continues to grow, often at a fixed or market-linked rate, depending on the plan type. It makes deferred annuity plans a good option if you are still working and want to build a reliable income stream for the future.

You can choose the deferment period on the basis of your retirement timeline, such as 5, 10, or even 15 years. The longer you defer the payout, the higher your eventual annuity income is likely to be. 

 

b. Immediate Annuity Plans 

The plan begins payments right after you invest a lump sum amount. It is most suitable for retirees or individuals who already have a retirement corpus ready. 

Since the income begins almost instantly, immediate annuity plans are ideal for those who seek guaranteed, predictable income soon after investment.

 

 

2. Based on Payout Duration

a. Lifetime Annuity

The option provides a regular income for as long as you live. It is the ultimate security against outliving your savings.

 

b. Annuity Certain

The plan guarantees income for a fixed, pre-defined period (e.g., 10, 15, or 20 years), regardless of the annuitant’s life. If you pass away during this period, your beneficiary continues to receive the payments (in most plans). 

 

3. Based on Payout Types

a. Variable Annuity

Your payouts are not fixed; they fluctuate based on the performance of the underlying investment funds you choose. A variable annuity offers potential for growth but also comes with market risks.

 

b. Fixed Annuity

You receive a pre-determined payout as the investment corpus is safe from market fluctuations. A fixed annuity is ideal for those who want assured, predictable returns. 

 

c. Increasing Annuity

Some annuity plans offer an optional rider that increases your payout annually by a fixed percentage (e.g., 3%) to help your income keep pace with inflation.

 

d. Annuity with Return of Purchase Price

A type of annuity pension plan which ensures that if you pass away early, the total premiums you paid (the purchase price) are returned to your nominee.

 

4. Based on the People Benefited

a. Single Life Annuity

Payments are made only for your lifetime in these types of annuity plans. The income stops once you pass away.

b. Survivor/ Joint Life Annuity

Payments continue for the lifetime of two people (usually you and your spouse). After one of you passes away, the survivor continues to receive a predetermined percentage of the income for life.

 

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What Are the Eligibility Criteria for an Annuity Plan?

Eligibility can vary between providers and specific plans. However, there are certain criteria common to different annuity plans in India:

 

  • The policy is usually available to individuals between 20 and 80 years of age. The maximum age can be even higher (up to 100 years) with some insurers. 

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  • Insurers often set a minimum initial investment required to purchase the plan. There will likely be a minimum annuity payout requirement as well. 

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  • The insurer will also have a minimum annuity duration that the policyholder can opt for.  

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  • Most annuity plans do not require a medical examination.

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  • The policyholder should be an Indian citizen or an NRI. 
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Documents Required to Buy Annuity Plans in India

To buy an annuity pension plan in India, you will need to submit the following documents:
 

 

Document Type

Specific Examples
Proof of IdentityPAN Card, Aadhaar Card, Passport, Voter ID
Proof of AddressAadhaar Card, Passport, Utility Bill (electricity, water), Bank Statement
Passport-sized PhotographsUsually, a recent photograph
Annuity Application FormDuly filled and signed form provided by the insurer

Factors to Consider Before Investing in the Best Annuity Plans in India

Before choosing among the best annuity plans in India, it is important to evaluate a few essential factors that influence your long-term financial stability.

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Annuity Rates

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Type of Annuity

  • Understand whether a fixed, variable, deferred, or immediate annuity suits your needs. For example, a fixed annuity offers stability, while a variable annuity may yield higher returns based on market performance. It is important to assess your risk appetite before going ahead.

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Payout Frequency

  • Choose how often you would like to receive income: monthly, quarterly, half-yearly, or annually. Consider your budget, regular expenses, and other retirement plans (if you have any) when choosing this option.

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Additional Benefits

  • Check the additional benefit of the annuity plan. They can include return of purchase price, joint life coverage, or inflation-adjusted increases that can enhance the long-term value.

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Age and Retirement Timeline

  • The later you choose to start receiving payouts, the higher your income tends to be. Align your annuity retirement plan with your expected retirement age.

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Insurer Credibility

  • Select a trusted insurance company that comes with a strong claim settlement record, financial stability, and a variety of pension plans. It is important because you will be receiving lifelong income from the company.

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Tax Implications

  • It is important to evaluate how the annuity payouts are taxed under your income bracket.

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Liquidity and Flexibility

  • Some annuity plans offer limited withdrawal or surrender options to help policyholders meet their urgent needs. The best annuity plan in India for you should offer the features that meet your financial needs.

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Family Protection

  • Consider adding joint life or return of purchase price options for your spouse to cover your dependents.
  • Assessing these factors will help you select the best annuity plan that offers guaranteed income, flexibility, and security throughout your retirement years.
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Annuity plans convert your savings into a dependable income stream for life or a defined period. It makes them a useful retirement planning tool to help you create a stable and secure financial foundation for your golden years. To choose the best annuity plan that meets your needs, it is important to evaluate your preferences and understand the options available in the market. Supplemented with other investments and financial instruments, annuity plans can be the core source of a happy and financially stress-free life after retirement. 

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FAQs

View All FAQ

What is the annuity rate?

Answer

It is the percentage return that an insurer offers on the amount you invest in an annuity. It is used to calculate your periodic payout amount. It is influenced by several factors, including your age, gender, the chosen payout option, and prevailing market interest rates. Essentially, a higher annuity rate means a higher income for you.

Suppose you invest ₹10 lakh in an annuity plan with an annuity rate of 6% per annum.

Your annual payout will be:

₹10,00,000 × 6% = ₹60,000 per year (or ₹5,000 per month).

If another insurer offers a 7% rate, your annual income increases to ₹70,000.

Comparing annuity rates before purchase helps you choose the best annuity plan that provides a higher lifetime income for the same investment.

Is an annuity a good investment?

Answer

Yes, it can be considered a good investment plan for retirement, as it gives certainty and predictability. But annuity plans may not match the growth of market-linked options. You can opt for a variable annuity plan if you want the returns associated with market-linked products. However, variable annuity plans also come with risk. Hence, it is best to proceed only after thorough research and planning.

How is the annuity calculated?

Answer

The annuity income is calculated based on the following factors:

The premium amount you have invested (higher amount = higher annuity income)

  • Your age and life expectancy 

  • The type of annuity plan you choose (for instance, a variable annuity may provide a higher return due to market performance). 

  • The promised annuity rate, and more. 

You can use an online annuity calculator provided by most insurers to get an estimate of your potential income.

Is there a limit on an annuity?

Answer

There is typically no government-set limit on how much you can invest in annuity plans in India. However, insurance companies may set their own maximum (and minimum) purchase amounts for their annuity plans. 

Insurance companies may also have limits on the age (minimum and maximum) of the policyholder. In addition, there may be a (minimum) limit on the annuity payouts one can receive per month. 

Are annuities good for senior citizens?

Answer

Yes, annuity plans, and especially immediate annuities, can be particularly beneficial for senior citizens. They provide a guaranteed regular income for life and financial independence during retirement years. The payout received from the annuity plan can help meet everyday expenses, tick off one’s travel bucket-list, take care of medical emergencies, and more. With proper annuity planning, senior citizens can ensure a happy and worry-free retirement. 

How do I buy an annuity?

Answer

You can buy annuity plans directly from a life insurance company or through a licensed financial advisor. 

The process will involve:

  • Filling out the application form

  • Submitting the required documents

  • Paying the premium. 

Before the process begins, remember to compare different options available in the market to choose the best annuity plan that suits your needs.

At what age should I buy an annuity?

Answer

The right age to buy annuity plans depends on your retirement goals. You can purchase a deferred annuity in your 30s or 40s to build a corpus. For an immediate annuity, the right time would be when you are ready to retire or are already retired. It will allow you to start receiving income right away.

When can you withdraw money from an annuity?

Answer

There are certain restrictions on withdrawing money from an annuity. You may be able to access funds only when you start receiving payouts. Certain annuity plans have a surrender clause, with certain conditions attached. Even so, withdrawing the principal during the surrender period can lead to high penalties. Some annuity plans may allow withdrawals in the case of specific critical illnesses. 

What is the difference between immediate and deferred annuities?

Answer

An immediate annuity plan starts giving payouts right after you invest a lump sum. It can be ideal for retirees needing instant income. In contrast, deferred annuity plans begin payments after a chosen deferment period, which allows your investment to grow in the meantime. Deferred annuities suit individuals who are still working, while immediate annuities are ideal for those who are already retired. The annuity rates for deferred options may be higher as there is a larger accumulation period before payouts begin.

Who should opt for annuity plans?

Answer

Annuity plans are ideal for retirees, working professionals and self-employed individuals planning their retirement, and conservative investors. Any individual looking to secure a safe and assured income during their golden years can buy an annuity plan. The payouts received from annuity plans can help retirees live a life free from financial worries and enjoy peace of mind. 

What happens to my annuity if I die?

Answer

It depends on the type of annuity plan you have chosen. In most plans (that offer a lifelong income), the payouts are only provided until the annuitant is alive. If you want to support your spouse’s financial needs even when you are no longer around, you can opt for a joint annuity plan. The right kind of annuity planning allows your spouse to receive a percentage of the annuity income at regular intervals after your demise. Such an option may also be available in annuity certain plans, where the payouts are provided for a fixed period, regardless of the circumstances. 

Is there an age limit for annuities?

Answer

Yes, insurance companies set minimum and maximum age limits for purchasing annuity plans. For example, the minimum age to buy is often 30 years, while the maximum entry age can be as high as 100 years for some immediate annuity plans.

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