What is an annuity: Types, Benefits & How It Works in Financial Planning

A financial product called an "annuity" provides you with consistent payments over time, usually after retirement. You receive consistent income later and pay money now (either in one lump sum or in instalments).

Example: Tushar wants to buy an annuity to secure his future.

He has two options:
 

1. Single Payment: Pay ₹10,00,000 once and receive ₹8,000 every month after retirement.
2. Multiple Payments: Pay ₹20,000 every year for 10 years (total ₹2,00,000) and get ₹5,000 monthly later.

Table: (Comparison of Tushar’s Choices)

This table shows you how Tushar chose.
 

This table helps you to understand one-time investment and yearly payments.

This article explains how to take advantage of an annuity. It is about making wise choices for future payments.

What is an Annuity?

Annuities are financial plans that, as a reward for payments you make now, provide you with an ongoing income in the future. It guarantees you don't run out of money later on; it is similar to a personal pension.

Example: Dev vs. Shikhar’s Annuity Choices

• Dev pays a lump sum of ₹10,00,000 at once. After 10 years, he starts getting ₹15,000 every month for life.
• Shikhar pays instalments of ₹10,000 every month for 10 years (total ₹12,00,000). After 10 years, he gets ₹12,000 monthly for life.

Both earn a consistent income, but they want to choose different payment methods.

Table: (Annuities Comparison of Dev and Shikhar)

This table shows you an annuity comparison through an example:

This table helps you to understand the initial payments and the total investment amount, which is good for you.

Key Points About Annuities:
 

• You pay now and receive your money back later, either all at once or over time.
• Helps when you need a trustworthy source of income in retirement.
• People respond differently to different plans; some are more flexible, and others pay more.

This example shows how an annuity works. Annuities might be an excellent option if you want a regular income in the future.

Types of Annuity

Annuities are plans that allow you to invest money and receive regular payments in the future. Various kinds are depending on how you want to grow your money and when you get paid.

Example: Aman Explains Annuity Types to Amber

Aman tells Amber about the five main annuity types:

1. Immediate Annuity
   • Pay ₹5,00,000 today and start getting ₹6,000 per month immediately
   • Best for retirees needing instant income
      
2. Deferred Annuity
   • Pay ₹3,000 per month for 15 years, and after 60, get ₹8,000 per month for life
   • Suitable for young earners planning ahead
      
3. Fixed Annuity
   • Invest ₹10,00,000 and get ₹9,000 per month guaranteed for 20 years
   • Safe option with predictable returns
4. Variable Annuity
   • Invest ₹8,00,000 and returns change based on market (could be ₹7,000-₹15,000 per month)
   • Higher risk but potential for more money
      
5. Indexed Annuity
   • Invest ₹7,00,000 and get returns linked to the stock index (min ₹5,500 per month guaranteed)
   • Balances safety and growth

These annuity types help you to understand where to invest for the best results according to your needs.

Table: Comparison of Aman's Examples

This table shows the mode of payment and payout mode:
 

This table helps you to understand what is good for you.

Key Takeaways
 

• Immediate = money now, Deferred = money later
• Fixed = safe amount, Variable = changes with the market
• Indexed = mix of safety and growth

This shows how various annuities work. Make your decision based on your risk acceptance and when you need the money.

How Annuities Work in Financial Planning

Annuities convert your hard-earned savings into a lifetime income, much like your own personal pension plan. When regular salary stops coming into your bank account, it safeguards your family's future.

Rohit's Story: A Middle-Class Family's Safety Net

The 48-year-old Rohit spent 25 years working for a private company. What's his greatest fear? After retirement, what happens? He decided on an annuity with ₹35,00,000 in savings and two college-bound children:

• Invested: ₹20,00,000 lump sum at age 50
• Receives: ₹14,500/month starting at 60 ( if the annuity rate is 6% to 7%)
• Protects: His wife, Preeti (homemaker), and the kids' education

The Turning Point

When Rohit's company offered early retirement at 58, his annuity played a role as a family guard:
 

1. Paid daughter's MBA fees (₹85,000 per year)
2. Covered medicines for his diabetes (₹2,500 per month)
3. Maintained household expenses when job hunting failed.

This pointer shows that an annuity provides you with financial security.

Table: 

This table shows you Rohit's Financial Shield:
 

This table shows you challenges with and without an annuity.

That ₹14,500 indicates value to Rohit's family; they wouldn't have to compromise on medications or borrow from relatives. In times of uncertainty, just plain, stable security.

Conclusion 

Annuities are similar to planting a money tree today that will bear consistent fruit for the rest of your life. By providing that you never run out of money, regardless of how long you live, they reduce the stress related to retirement. 

Annuities can be specific to meet your needs, whether you're like Mayank, who wanted tax savings or Rohit, who needed security after an early retirement. They keep your family safe financially while protecting you from inflation, market crashes, and life's unexpected happenings.

 The best aspect? Even small, consistent investments may generate significant lifetime income, so you don't need to be wealthy to get started. Understanding that your golden years will be truly golden is more important than money.

FAQs

1. What happens if I die early?

Depends on your plan. Some stop payments, others give the balance to the family. Always choose the "return of purchase price" option if worried about this.

2. Can I get my money back if I change my mind?

Most annuities lock your money for 5+ years. Early withdrawals have heavy penalties; treat it like a long-term commitment, not a savings account.

3. Are annuity payments taxable?

Yes, but only the interest part (not your original investment). Senior citizens get tax benefits - the first ₹50,000 per year is tax-free under Section 80TTB.

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