Retirement is a milestone in a person’s life which is symbolized by the absence of a scheduled day to day official calendar and the regular pay check that comes as a result of it. After retirement, a person’s bills remain the same or even increase due to the gradual onset of old age and the medical conditions that come with it and if proper planning has not been done, the situation can wreak havoc on the savings and available monetary resources. This is where the importance of having an annuity product comes in. Annuity is a sort of an agreement between the provider and the subscriber, under which the subscriber, at a later stage of life (usually after retirement), becomes entitled to a payout from the corpus which is built by that time.
Annuity can be thought of more as an insurance vehicle than a saving and investment option and the payouts can be of varied forms. For instance NPS (National Pension Scheme) in India is one of the most sought-after annuity products that are sponsored by the government. Purchasing an annuity is very essential given the fact that after retirement, having a regular income or having a financial corpus is very crucial. Annuity is of several types, when seen in the context of the types of payouts that it offers. These types are listed below:
Periodic annuity:This is the type of annuity which entitles a subscriber to receive regular payouts in a pre-decided frequency. The frequency can be monthly or pre-set like after a certain number of years. A monthly annuity payout, therefore, is like the monthly pension and allows the subscriber to receive a regular, monthly amount and is the most common type of annuity.
Lump-sum annuity:Unlike a periodic annuity, a lump-sum annuity, as the name suggests, has the option of a one-time, lump-sum payout. This means that depending on the terms and conditions, a subscriber can withdraw a lump-sum amount (usually a set percentage of the entire corpus) after a particular time. However, generally the lump-sum annuity schemes do not have the option of a 100% withdrawal and a fixed percentage of the corpus has to be kept in place.
Deferred annuity:The term deferred means a certain period of lag. A deferred annuity product has a certain pre-decided time gap between the accumulation of premiums and the eventual payouts to the subscriber. In insurance terms, this time gap is referred to as “accumulation time”. So, in actuality, during the accumulation time, the subscriber has to pay the premiums and after this time is over, becomes eligible for annuity payouts.
Immediate annuity:This is opposite of deferred annuity and in this mode, the premium is paid as a fixed lump sum percentage by the subscriber. The subscriber becomes eligible for receiving the payouts immediately after the payment of this lump sum amount.
Fixed annuity:This is the type of annuity which functions like a fixed monthly pension and offers fixed payouts. This is a relatively safe mode in which the corpus is generated by investment in fixed income options. The payouts are fixed; however the chances of any significant increase in the corpus amount are extremely low.
Variable annuity:In this type of annuity, the investment for the corpus is done market-linked options. This means that the development of the main fund and the eventual payouts is dependent on the performance of a fund. This is a risk-oriented annuity and the amount of payout keeps on changing (based on market performance).
Since annuity is formulated to serve as a regular (usually monthly) pension income, it is taxable as per various slabs, governed by the existing taxation rules. The taxation formats are listed below:
- Up to an annual income of Rs 3 Lac, no taxes are applicable for either the senior (60-80 years) citizens or super senior (more than 80 years) citizens.
- From Rs. 3-5 Lac, 10% on amount (exceeding Rs 3 Lac) is charged for senior citizens while no tax is applicable for super senior citizens.
- From Rs. 5-10 Lac, an amount of Rs. 20000+20% on income exceeding Rs. 5 Lac is charged for senior citizens while for super senior citizens, 20% of income exceeding Rs 5 Lac is charged.
- For amounts greater than Rs 10 Lac, Rs 1.2 Lac+30% on income exceeding Rs 10 Lac is charged (for senior citizens) and Rs. 1 Lac+30% on income exceeding Rs 10 Lac is charged (for super senior citizens).
Calculation of annuity is a projected activity using annuity calculator (as the future market projections cannot be exactly arrived at). The factors that are taken into consideration while calculating the annuity are as follow:
Information about income:Information about the income sources (the earnest amount annually, the rate of growth in income etc.) is one parameter while calculating the annuity.
Information about demography:This information includes the basic information about the subscriber’s age etc. An early subscription entitles the subscriber to an elongated coverage, due to the compounding effect.
Inflation:Inflation is a key parameter that has a direct impact on the annuity corpus and the rate of inflation decides the bulk volume of savings.
Current savings and expenditure:A separate statement of current savings for retirement and the detailed statement of current expenditure are important factors while calculating the expected annuity build-up.
RoR (Rate of Return):Rates return may be fixed or variable, depending on the type of investment vehicle. Fixed rates mean a fixed return while the variable rates mean a market-linked return option.
HDFC Life offers various pension plans that are aimed at securing your financial health after retirement. For details, click on the mentioned link: https://www.hdfclife.com/retirement-and-pension-plans.
- How to Choose the Right Annuity Plan
- Regular Annuity Payouts or Lump Sum Benefit - How to Choose?
- Things That Affect Your Annuity Income
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