An annuity is a financial agreement entered into between an insurance company& a policyholder. It refers to an amount invested either in regular payments or in a lump sum. In exchange, the insurance provider provides a regular flow of income to the annuitant. Under this plan, the payment will either start immediately (immediate annuity) or after a certain period (deferred annuity).The Annuity Plans in India have become so popular for those individuals who are looking for a regular income post retirement, hence providing financial stability.Annuity plans offer a secure & stress-free retirement period, ensuring a guaranteed, regular source of income. An annuity plan can be chosen depending on the requirements of the family & investment horizon.
What is an Immediate Annuity Plan?
An immediate annuity plan is a contract entered into between an insurance company & an individual. Under this plan, an individual is required to make a payment towards the premium in a lump sum. & in exchange for which insurance company pays periodically for a certain time or for a lifetime. The payouts start immediately, i.e. within typically a month to within a year of making payment towards the premium amount.
What is a Deferred Annuity Plan?
A deferred annuity plan is a contract that an individual is required to make premium payments either in a lump sum or in series, against which the insurance company promises to pay in the future. Under this plan, the funds are accumulated during the accumulation phase, & then the payouts start during the annuitisation phase, i.e., post-retirement.
Differences between an Immediate Annuity Plan and a Deferred Annuity Plan
While selecting between the different options available, it is important to understand the differences between the two, once you have understood what is annuity plan:
| Basis of Difference | Immediate Annuity | Deferred Annuity |
| Meaning | This includes receipt of payout immediately after the investment, which can be monthly or annually. | This includes payment of premium in monthly, annual or lump sum mode for a pre-decided tenure. |
| Objective | To receive income immediately after the plan is bought. | To provide future income, i.e. long-term savings. |
| Premium Payment | One single payment is to be made, i.e. which is called the purchase price. | Single, regular, or limited payments are allowed. |
| Death benefit | In case of the death of the annuitant, the death benefits would be received by their nominee. | In case of the death of the annuitant, the death benefits would be received by their nominee. |
| Tax Benefits | Premiums paid are allowed as deductions under Section 80CCC. | The premiums paid are allowed as a tax deduction u/s 80CCC. Partly commuted value of corpus funds is exempt from tax u/s 10(10A). |
| Payout | It starts immediately after the investment. | It starts once all the premium payments have been completed. |
| Best Suits | Those near to their retirement | Those who have time left in retirement & want to do retirement planning. |
| Investment Growth | Since payouts start immediately, no growth in investments. | Higher returns due to deferment in the period. |
| Withdrawals | Partial withdrawals are not allowed | Allowed, but with penalties or leading to lower returns. |
| Affordability | Expensive | Cost-effective |
Factors to be considered while Choosing between an Immediate & Deferred Annuity Plan
Provided are the factors that can be considered while choosing between an immediate & deferred annuity plan:
- Your Current Financial Needs
Depending on your financial requirements, you can decide to either opt for an immediate or deferred annuity plan. If you want funds instantly, opt for an immediate plan; otherwise, opt for a deferred annuity plan.
- Tax Benefits
In case you want tax benefits, a deferred plan is better, as taxes can be deferred till the time funds are growing. Under an immediate annuity plan, payouts start immediately, hence attracting taxes. Accumulation phase does not attract any taxes but annuity phase does attract pension as per your income tax slab.
- Investment Growth Potential
If you want growth in your funds, opt for a deferred plan, as they allow your funds to grow, hence offering higher returns.
- Risk Appetite
If you prefer low risk, opt for an annuity plan which offers guaranteed returns, & if you can take high risk to avail high returns, opt for an annuity plan, which is linked to the market.
Which One Should be Chosen for Retirement?
The selection of a plan between immediate & deferred is dependent on the financial objectives, risk tolerance level, affordability, & financial condition of an individual. Let us understandthe attributes of both plans to make an informed decision.
- Though a deferred annuity plan is an affordable plan in comparison to an immediate annuity plan, it might not suit investors who are close to their retirement. An immediate annuity plan best suits those individuals who are looking for an immediate assured income, close to retirement.
- On the other hand, a deferred plan provides flexibility with a high growth potential, letting a young investor plan for their long-term goals & take advantage of time.
Hence, the selection of a plan also depends on certain factors such as risk tolerance level, financial objectives, timing, etc. Once you have understood the differences between the two plans, choosing between them is quite challenging. Here is a simple way to select:
- Opt for an Immediate Annuity Plan if:
- Your retirement is approaching, & you expect a guaranteed flow of income.
- You have a lump sum amount to be invested.
- You do not want your savings to get exhausted sooner.
- You prefer a convenient & simple-to-understand plan.
- Opt for a Deferred Annuity Plan if:
- Your retirement still has time left, & you want to build a retirement corpus.
- You want to invest in tax-deferred growth opportunities.
- You want to decide the time period from when the income is to start.
- You have enough funds available to save for retirement.
Conclusion
Both the plans have their own pros & cons, henceunderstanding the differences mentioned above helps in making an informed decision. It is also important to consider the retirement objectives, financial condition, & risk tolerance level to make an informed decision. Additionally, for retirement purposes, one should consider the associated charges, returns, & death benefits that best suit one’s retirement objectives.
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Image Published on September 28th, 2020
