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Is an Annuity Plan Right for You?

Is an Annuity Plan Right for You?
Highlights

When you retire, your income is also retired, but your expenses continue to remain same or even rises due to inflation. It means you need a financial...

When you retire, your income is also retired, but your expenses continue to remain same or even rises due to inflation. It means you need a financial instrument to secure your rest of life. Here comes the role of an annuity plan which acts as a pension for life.

Though, annuity plans assure a fixed source of income after retirement, are they enough to lead a worry-free retirement life? Let's find out the answer.

Annuity plans provide you with a guaranteed income, either for life or the specified duration. They are mainly designed to safeguard a retiree from a risk of outliving the savings. Instead, this risk is protected by insurance companies.

Now, when you have understood what annuity entails, let's discuss benefits offered by it=

  1. Assured income until death:
    An annuity you the security that you will continue to receive money for the rest of your life. ensure that your money lasts as long as you are alive. You can choose to receive a fixed payout at different intervals— monthly, quarterly, half-yearly or annually—as per your needs.
  2. No maximum limit for the investment: There is no maximum limit as you can purchase an annuity plan for any amount you wish.
  3. No reinvestment risks: Annuities help in eliminating the re-investment risks which products like tax saving fixed deposits (FDs) and senior citizens' saving scheme have to face. You always run the risk of reinvesting the principal amount when the market is low. But when you invest in an annuity, you have been guaranteed the same kind of rate of payout for the rest of the life.

While, annuities give a guaranteed sum of money, and hence stability to retirees, they come loaded with a few glaring drawbacks too.

  1. Low-interest rate: The annual returns on annuities have not been so attractive in comparison to the other investment options. For instance, a tax saving fixed deposits may offer returns between 6% and 8%, while annuities fetch low.
  2. No access to capital: Because access to the amount , not many people invest in annuity plans. On the other hand, in instruments like tax saving FDs, the investor gets his/her capital back after five years, and therefore, they prefer to go with them.
  3. Fail to beat the inflation: The inflation power affects the purchasing power, especially after retirement. As annuity plans disburse the fixed payouts throughout the life, they can prove woefully insufficient to deal with inflation after retirement.
  4. Premature withdrawals are not allowed: In the case, of unit-linked insurance plans, you can withdraw money after five years. Also, tax saving FDs make it feasible to by paying penalty charges. However, this option is not available with annuity plans.
  5. Taxable income: All payments received under annuity plans are under the head 'income from other sources.

Should you Invest in an Annuity?

Relying solely on annuity plans can go against you, especially when you need money to pay a large and unexpected expenditure, but your money is tied up in an annuity plan. However, there could be another investor who has accumulated sufficient corpus and is unlikely to face a deficit. For such investors, annuity plan is a great idea because of the fixed source of income it gives.

Therefore, instead of putting all your money in annuity plan, you can diversify your retirement portfolio by including ULIP, pension plans, debt mutual funds, senior citizen saving scheme and tax-free bonds. For regular income generation, a proper mix of fixed income instruments like debt mutual funds and tax-free bonds with more than ten-year tenure can be considered.

Combat Inflation

Your investment alone in conservative investment options like annuities will not give returns enough to beat inflation. Over the long run, equity markets offer high returns, and therefore, it is worthwhile to invest in equity mutual funds. You can invest in equities through systematic investment plan and stay secure from market volatility.

Conclusion

Remember, after working for so many years; you owe yourself a comfortable and secure retirement life which is possible only with the right mix of investment options. You can divide your money into an annuity plan and other investment products, including equity, to enjoy the best of both the worlds.

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