Annuity Meaning

Table of Content

1. How Do Annuities Work?

2. Secure Your Retirement with Our Pension Plans

3. What are the Features of Annuity?

4. What are the different types of annuities?

5. Benefits of Various Types of Annuity

6. How Do the Different Types of Annuities Function?

7. Who Should Buy Annuity Plan?

8. When is the Right Time to Buy an Annuity Plan?

9. What Are Tax Implications Of Annuities?

10. Benefits of Annuity plans

11. Example of an annuity

12. What is the Surrender Period?

13. Conclusion

14. FAQs on What is Annuity

If you are wondering what is annuity, it is a financial product that provides an individual with a steady income after their retirement by converting their savings into a regular payout system. After investing a lump sum or recurring premiums, the investor receives guaranteed payments, either immediately or after a period, depending on the annuity type. This helps you manage your post-retirement expenses and maintain financial independence in your golden years, making it a crucial part of a well-rounded retirement plan. 

The current era is defined by healthcare inflation, increasing life expectancy, and evolving family norms, leading to the need to secure a reliable source of income in retirement. Annuity, here, becomes that one tool you can utilise to get a consistent flow of income after you retire.

An annuity plan has two phases:

• Accumulation Phase –

where you invest regularly or as a lump sum.

• Distribution (Vesting) Phase –

where you begin receiving regular income upon reaching a certain age.

Different types of annuities include:

• Immediate annuity:

Starts income right after you invest a lump sum.

• Deferred annuity:

Income begins after a future date, making it ideal for long-term planning.

• Fixed annuity:

Offers guaranteed, stable payouts.

• Market-linked annuity:

Income depends on investment performance and suits those open to higher returns with some risk.

For instance, if you invest Rs. 10 lakh in an annuity plan at age 60, you could start receiving a monthly pension of around Rs. 6,000 to Rs. 7,000, depending on the plan type and annuity rate.

You can further customise annuities for lifetime income, joint payouts with a spouse, or return of premium to nominees, along with your financial goals, such as for a specific term or get it as a lifetime income.

This financial plan is ideal for retirees, self-employed individuals, or anyone seeking stable post-retirement income annuities to help combat longevity risk and inflation.

Moreover, the income you receive from an annuity is generated through:

● Interest earned on fixed-income investments (for fixed annuities)

● Returns from market-linked instruments such as equities and debt funds (in case of variable or ULIP-based annuities)

Up next, we will explore in detail how annuities actually work, their types and benefits, and more.

How Do Annuities Work?

An annuity contract offers you a guaranteed stream of income after your retirement. This process is segregated into two main phases. The details are below:

1

Accumulation Phase - When You Pay

You have two options to purchase an annuity plan. They are-

- By investing a lump sum amount as a part of an immediate annuity plan.

- Through regular premium payment as a part of a deferred annuity plan.

In this phase, the annuity insurance provider invests your contribution in fixed-income assets or any market-linked instruments. Over time, your investment starts growing with the help of compound interests.

For instance, if you invest Rs. 10 lakh at an 8% annual return in a deferred annuity, your corpus can grow to over Rs. 21.5 lakh in 10 years. You can easily use a retirement calculator to determine the optimal amount to invest.

2

Distribution Phase - When You Receive the Income:

When an individual reaches the vesting age (generally 60 years), the financial institution or the insurance company starts paying a fixed income, either monthly, quarterly, or annually, for life or a set tenure.

For example, under the HDFC Life Smart Pension Plus scheme, you can opt for a life annuity with a return of premium where your nominee gets the premium back after your demise (HDFC Life Smart Pension Plus).

It is critical to understand that annuity providers, such as HDFC Life, offer a stable and lifelong income option, regardless of any market conditions. This helps in making annuity planning a reliable pillar for retirement savings plans.

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What are Features of Annuity?

Read below to understand the key features of annuity before investing in one:

• Guaranteed Regular Income

Annuities provide a predictable stream of income that is paid either monthly, quarterly, half-yearly, or yearly, as per your needs and financial goals. It ensures that you do not have to worry about changing market returns after your retirement. Also, your payout remains steady regardless of how the market cycle changes.

• Flexible Payout Frequency

The intervals of paper are always an investor's decisions based on their cash flow requirement or the lifestyle they want to lead. Whether you prefer a monthly pension to cover your daily expenses or annual payouts for any large expense, most annuity plans allow customisation as necessary.

• Return of Purchase Price Option

There are some annuity plans that include the ROP or Return of Purchase Price feature. This feature states that the total premium invested is returned to the nominee when the investor passes away. Such plans offer slightly lower regular payouts in exchange for principal protection. This also makes it ideal for individuals who want to leave a financial legacy while still receiving a steady income.

• Lifetime or Fixed Term Payouts

  • Lifetime Annuity:   Provides guaranteed income for your entire life.
  • Fixed-Term Annuity (e.g., 10 or 20 years):  Pays a fixed amount for a predefined period. Remember that selecting a fixed-term payout helps align income with specific goals, like funding education for grandchildren. On the other hand, lifetime payouts protect against outliving your savings.

When choosing an annuity plan, you have the option to choose between:

• Joint Life Annuity Option

With this option, payouts continue to your spouse (or another named person) even after your death. In this case, the surviving partner receives the same or a slightly reduced pension. This ensures financial security for joint individuals without interruption.

These features reflect a practical annuity definition, which emphasises predictability, stability, and customisation.

What are the different types of annuities?

The annuity market in India was USD 5.3 billion in 2024 and is projected to double to over USD 10 billion by 2032. This can be possible due to the availability of different types of annuities. So here are the details on different annuity types:

• Immediate Annuities

In this type, you invest a lump sum amount and start receiving the payouts immediately without having any accumulation phase. This is ideal for people who are near their retirement age or have already retired and need instant income and financial security. While these offer limited flexibility (e.g., no easy withdrawals or corpus growth), they guarantee predictable cash flow.

For example, HDFC Life’s Smart Pension Plus offers immediate payout options designed for retirees who prefer simplicity over complexity.

• Deferred Annuities

For young or middle-aged individuals who want to plan their finances earlier, this plan is feasible. This is because the money grows first, and the payouts start later in this case. You can tailor the premium amount, contribution duration, and payout start date to match your retirement goals. The flexibility ensures you accumulate a meaningful corpus when it matters most.

• Fixed Annuity

This scheme offers guaranteed payouts at fixed interest rates that are locked in at inception. It is best for conservative investors who value stability and predictability. Market fluctuations do not impact your returns, ensuring a steady income stream. For example, fixed annuities are suitable for retirees who want to keep their money secured against market volatility.

• Variable Annuity

  Annuity payouts significantly depend on the performance of market-linked investments. Here is how it is done:

● Accumulation Phase

This phase is when you start investing as well as accumulating cash, commencing from the date when you pay the premium for the first time.

● Vesting Phase

This is the date from when you will start getting the benefits of the annuity policy in terms of regular pensions.

It is crucial to understand that variable annuities suit financially savvy investors seeking market-linked growth and willing to track performance actively.

Go through the following table to get a detailed comparison of different annuity types. Each type further refines the annuity meaning, depending on your risk profile, timeline, and goals.

Benefits of Various Types of Annuity

Different types of annuities offer you different advantages that have been discussed in detail below:

• Benefits of Immediate Annuities

For those who are planning to retire soon or who are getting a sizable payment, such as a policy maturity, immediate annuities begin paying out as soon as you invest a lump sum. They remove concerns about market volatility by offering a fixed monthly income.

This scheme also provides peace of mind because there is no need to handle money or make additional judgments. Retirees who want immediate income or those looking for a steady, lifetime payout free from the hassle of constant investing decisions may particularly benefit from this.

For instance, a 60-year-old retiree receives Rs. 7,200 monthly from Rs. 12 lakh, ensuring no gap in income right after retirement.

• Benefits of Deferred Annuities

Deferred annuities are ideal for long-term retirement planning because they let you build money over time before payouts start. During the accumulation period, you can invest gradually and benefit from tax-deferred growth. Usually starting at a selected retirement age, payouts have the potential to yield larger profits.

People in their 30s to 50s who want to guarantee future income can benefit from these annuities. Additionally, they provide flexibility, nominee death benefits, and customisation choices to meet your risk tolerance and financial objectives.

For example, a 40-year-old invests Rs. 5,000 monthly; by age 60, the corpus, boosted through compounding, supports higher pension payouts.

How Do the Different Types of Annuities Function?

Different annuities functions as per their features that are discussed in detail below:

• Life Annuity

This annuity provides a consistent income for the duration of your life, ending when you pass away and leaving no inheritance for your heirs. It provides a longevity guarantee at the expense of leaving no legacy, making it perfect for anyone looking to protect themselves from outliving their wealth.

• Life Annuity with Refund of Purchase Amount

In this case, your income is guaranteed for as long as you live, and the financial institution or insurance company reimburses your nominee for your initial investment if you die before your time. It strikes a balance between security and legacy planning by combining a death benefit with lifetime income.

• Annuity Paid for Set Period (Fixed Term Annuity)

Regardless of your survival, this guarantees set rewards for a predetermined period (for example, 10–20 years). It provides financial stability and is effective for people handling legacy funds or fixed expenditures like EMIs.

• Annuity Linked to Inflation (Inflation-Indexed Annuity)

This annuity protects your buying power with yearly increases based on inflation (CPI or another index). Over time, it aids in preserving real income because of India's CPI inflation, which is around 2.59% as of May 2025.

• Annuity for Surviving Joint Life (Joint Life Last Survivor Annuity)

Mainly intended for couples, this scheme ensures continuous income until both annuitants have gone away by paying you and continuing, in whole or in part, to your spouse after your death.

• Joint Life Annuity with Refund of Initial Payment

This annuity strikes a balance between continuing assistance and legacy preservation by combining joint-life continuity with a refund provision. It provides lifetime income to two individuals and refunds the purchase price to beneficiaries after both pass away.

Who Should Buy Annuity Plan?

An annuity plan is suitable for individuals who:

● Are retiring without a pension and want a steady income source after retirement.

● Prefer guaranteed returns over market-linked investments and are risk-averse.

● Seek financial stability to cover regular expenses like bills, healthcare, and daily needs.

● Want lifetime income without worrying about market fluctuations or fund depletion.

● Plan to live independently, especially in the absence of family financial support.

● Have a lump sum from savings, inheritance, or retirement funds and want to convert it into monthly payouts.

For instance, a retired couple with no pension can opt for a joint-life annuity to ensure income for both lives. Understanding what is annuity plan is helps align product features with real-life financial goals.

When is the Right Time to Buy an Annuity Plan?

Your life stage, interest rates, and personal objectives all play a crucial role in finalising when you should buy an annuity. Look at these details:

● Financial consultants often advise purchasing between the ages of 50 and 70, when you are getting close to retirement and have funds available to turn into guaranteed income.

● Age matters significantly since insurers anticipate shorter lifespans and older purchasers earn larger rewards. Annuity rates, for instance, can increase from almost 6.6% at age 60 to almost 11.6% at age 70.

● Timing is also influenced by interest rates. Higher bond yields immediately increase annuity payouts, so a rising rate environment (e.g., above 7 %) may signal a good purchase window.

What are the Tax Implications of Annuities?

Tax Implications in Income Tax Act 1961¹ Under Sections 80C, 80CCC, and 80CCD, annuity contributions are tax deductible up to Rs. 1.5 lakh annually. Further benefit of deferred annuities is tax deferral, which allows your money to grow tax-free until payouts start.

Once payouts start, annuity income is considered 'Income from Other Sources' (deferred plans) or 'Salaries' (immediate or employer-funded annuities) and taxed as per your income slab. A standard deduction of Rs. 50,000 (or actual income received, whichever is less) can also be deducted from your annuity taxable income.

For example, if you receive Rs. 1.2 lakh annually from an annuity, it will be taxed as per your income slab, but you can claim a Rs. 50,000 standard deduction under current tax rules.

Benefits of Annuity plans

The benefits of annuity plans are as follows:

• Guaranteed Income

Annuities provide a steady stream of income post retirement, which turns out to be helpful in providing financial stability by covering living expenses through the guaranteed payout.

• Lifetime Income

Some annuity plans also offer a lifetime income option, which ensures that you receive payouts for the rest of your remaining lifespan, irrespective of how long you go on to live. This removes the risk of outliving your annuity savings.

• Creditor Protection

In certain scenarios, annuities can also offer protection from creditors, thus helping you safeguard your assets from potential financial risks.

• Death Benefits

Some types of annuities offer death benefits as well, which provide a financial benefit for your nominees by assuring them guaranteed payments after your demise.

• Tax-Deferred Growth

Earnings from your annuity are tax-deferred until you start making withdrawals. This allows your investment to rise faster when compared to investments whose earnings keep getting taxed.

• Multiple Payout Options

Annuities allow multiple payout options, like periodic or lump-sum withdrawals, or even a combination of both of them, thus giving you the flexibility to manage your finances upon retirement.

• No Contribution Limits

Annuities typically involve no contribution limits, thus allowing you to invest bigger sums, to secure your post-retirement income.

Example of an annuity

A simple example of an annuity can be in the form of NPS (National Pension System). An annuity in NPS refers to a regular income that you receive after the retirement age of 60. Given that it is mandatory to buy an annuity as a component of NPS, this ensures a steady and guaranteed income for you after retirement. As per PFRDA's rules, a minimum of 40% of your total accumulated NPS corpus has to be compulsorily used towards the purchase of an annuity. The remaining 60% of the NPS corpus is free to be withdrawn tax-free and in a lump sum.

What is the Surrender Period?

The surrender period is the lock-in time frame of an annuity during which you cannot fully or partially withdraw the funds without incurring a penalty. It generally lasts 5–10 years, depending on the annuity terms.

Early exit during this period leads to surrender charges, often starting at 7% – 10% in the first year and decreasing by about 1% annually. For example, if you withdraw Rs. 1 lakh in year 1, you could face a Rs. 10,000 fee; by year 5, the fee might drop to Rs. 3,000. These charges compensate insurers for upfront costs and discourage premature exits.

Surrender period in annuity matters since:

● It lowers your withdrawal amount significantly

● Influences your decision when selecting an annuity. It is important to choose one with surrender terms that align with your cash flow needs.

Conclusion

If you wish to have a stable and guaranteed income post retirement, check of HDFC life Pension Guaranteed Plan, or you can consider exploring HDFC Life Annuity Plans.

Once you buy the right annuity plan after factoring in your retirement age, risk appetite, and financial goals, annuities can prove to be a great retirement planning tool through the dependable income stream.

Keep in mind that the primary aim of annuities is to make sure that you get financial freedom post your retirement, and enjoy that golden period without any financial worry. You can use the annuity payout for many purposes, from covering your daily expenses to big post retirement goals.

FAQs on What is Annuity

Q. How does an annuity plan work?

Annuities are a retirement income plan aimed to provide you with a steady income during your retirement years. Annuity meaning is in the form of a formal contract; annuities first need you to make either a lump sum payment or regular smaller payments to the insurance company, and, in return, the insurer gives you a payout (whether as a lump sum or pension) at pre-decided time intervals, or even immediately, according to your financial requirements.

Q. When should I buy an annuity?

As per financial experts, it is usually suggested to buy an annuity between the age of 50- to 70 years. However, it is wise to factor in your financial goals, risk appetite, and planned retirement age and then make the decision to buy annuities accordingly. You can take suggestions from experts when planning to purchase annuity plans from one of India's leading insurers, HDFC Life.

Q. What is the rate of return in an annuity?

The rate of return on annuity plans differs depending on the chosen annuity plan for investment. The returns on annuities can usually range between 5%-8% per annum.

Q. How much do I need to invest in annuity?

There is no exact limit on the amount that you have to invest in annuities. Factor in your financial goals, investment horizon, current and expected assets and liabilities, risk appetite, retirement age, etc. and then accordingly arrive at the amount you need to invest in annuity plans.

Q. What is annuity in simple words?

In simple words, an annuity is a formal contract signed between you and an insurer in which you make either a lump sum payment or regular smaller payments to the company and in return, the insurer gives you a payout at pre-decided time intervals or even immediately.

References:

• https://www.forbes.com/sites/lawrencelight/2023/08/14/should-you-buy-an-annuity-the-ins-and-the-outs/
• https://cleartax.in/glossary/annuity

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