Deferred Annuity

Table of Content

1. Secure Your Retirement with HDFC Life Pension Plans

2. Secure Your Retirement with Our Pension Plans

3. How do Deferred Annuities Work?

4. Types of Deferred Annuities

5. Advantages of Deferred Annuity

6. Disadvantages of a Deferred Annuity

7. Who Should Think About Getting a Deferred Annuity?

8. Summary

9. FAQs on Deferred Annuity

Deferred Annuity is a significant long-term financial instrument offered by an insurer. It promises the owner a lump sum of money or a regular income as part of their retirement plan. 

The primary objective of this type of investment is to make life after retirement secure and comfortable, both financially and emotionally. It works in 2 phases: 

1. The Accumulation Phase allows the owner's money to accumulate and grow faster.

2. Payout Phase marks the beginning of receiving income. 

For example, a 40-year-old man decides to invest ₹2000 per month in a deferred annuity plan for 20 years. Throughout the accumulation phase, his insurer invests that amount in the market. And the annuity starts to grow. After 20 years in the payout phase, when he turns 60 and retires, he will receive monthly income similar to a pension. 

Moreover, the most significant feature of this plan is that the person does not have to pay immediate taxes on the interest earned.

Secure Your Retirement with HDFC Life Pension Plans

Now that you have a clear understanding of deferred annuity meaning and how it works, here is a range of pension plans offered by us for a greater tomorrow: 

• 30K/month Pension Plan

This type of pension plan is ideal for people who want to have a stable future by covering essential expenses without compromising their standard of living. Essential expenses, such as local travel, groceries and utilities. 

For example, if you opt for the HDFC Life Smart Pension Plan, with an investment of only ₹30,000 annually, you can expect a future payout either as a lump sum or as regular payments. Furthermore, you can receive:

1.  Up to 105% of the total premium as life insurance cover

2.  Flexibility to customise the vesting dates and premium payment terms.  

• 50K/month Pension Plan

People who expect to have a comfortable retirement would be interested in investing in such a plan. It will not only allow them to cover the essentials but also their potential medical costs and small leisure activities.

• 75K/month Pension Plan

A 75K/month Pension plan is perfect for those who are planning for moderate comfort. It will enable a policyholder to go on a few vacations, occasional indulgences and cover essential expenses. 

• 1 Lakh/month Pension Plan

Retirees who look for complete financial independence and flexibility can opt for 1 Lakh/month Pension plan. Besides covering daily essentials, it will help to have some funds left for various lifestyle preferences. 

• 1.5 Lakh/month Pension Plan

Appropriate for people who look for ultimate comfort, international travel, and high-quality healthcare. 

• 2 Lakh/month Pension Plan

Usually, business owners and high-income professionals choose this plan. It enables them to maintain a high-end lifestyle even after retirement. This includes estate planning, international travel and luxury spending. 

To achieve a higher amount of pension ranging from ₹50k per month or ₹2 lakhs per month, you can try the HDFC Life Pension Guaranteed Plan. This single premium annuity offers a return on the purchase price and allows nominees to receive this amount in case the annuitant dies.

How do Deferred Annuities Work?

A deferred annuity allows you to invest money now and start receiving payouts later, making it ideal for long-term retirement planning. Here is how it works, step by step:

1. You Invest

You can fund a deferred annuity in two main ways:

● Single premium: A one-time lump sum investment.

● Flexible/regular premiums: Smaller payments are made monthly, quarterly, or annually.

2. Accumulation Phase

Once you invest, your money enters the accumulation phase, a period during which your investment grows, either:

● At a fixed interest rate (fixed deferred annuity), or

● Based on market performance (variable deferred annuity).

During this phase, your returns grow tax-deferred, meaning you do not pay taxes on earnings until withdrawal.

3. Deferral Period

This is the waiting period between your initial investment and when you begin receiving payments. You decide how long it lasts, 5, 10, 20 years or more, depending on your retirement goals.

4. You Begin Receiving Payouts

Once the deferral period ends, you enter the distribution phase. At this point, you can:

● Convert your annuity into regular income (monthly, quarterly, annually), or

● Withdraw lump sums as needed, depending on the annuity terms.

You also choose how long the payments last—either:

● For a fixed number of years, or

● For your entire lifetime (or your spouse's, too, in joint annuities).

5. Flexibility in Premiums and Payouts

Deferred annuities offer:

● Customisable payment frequency during the payout phase.

● Flexible contribution schedules during the accumulation phase.

● Optional riders (like death benefits or inflation protection) for enhanced security.

Moreover, if you think about how deferred annuity is different from an immediate annuity, it is:

● A deferred annuity starts payouts after a waiting period, giving your money time to grow.

● An immediate annuity begins payouts almost immediately after the investment, usually within 12 months.

So, if you are planning for the future, deferred annuities offer growth and customisation. If you need income right away, immediate annuities work better.

Types of Deferred Annuities

There are various ways to grow your money. Here are some key types of annuities to choose from:

1. Fixed Deferred Annuity

Starting as a dependable savings vehicle, it is the most predictable annuity type. It has tax advantages and guarantees a regular stream of income that you can use throughout your life.

For example, when you pay ₹5000 per month as premiums to an insurer for 15 years, they invest that amount in the market to create returns, such as in equities. This amount will grow up to ₹13,10,090 if the return occurs at 4% rate. You can either choose to receive guaranteed returns for a fixed 10 to 20 years, or you can opt for regular income payments for a lifetime.

NOTE: The above example is for Illustrative Purpose only, actual figures might differ.  

2. Variable Deferred Annuity

Even though this type of deferred annuity does not guarantee regular income as a fixed deferred annuity, it allows the annuitant to take advantage of the market volatility. As returns vary depending on market performance, there are chances of gaining higher returns.

3. Indexed Deferred Annuity

In this context, the returns are directly linked to a specific equity index performance or a stock. It provides guaranteed minimum returns by combining both fixed and variable annuities.

4. Longevity Annuity

It is a type of fixed annuity that is sold to an investor when they are on the verge of retiring. The investor pays a high amount upfront that guarantees a lifetime income beginning at a future date.

The only drawback in this type of annuity is that, in case of the investor’s death, the beneficiaries get nothing unless the death benefit is bought.

Advantages of Deferred Annuity

The provision for tax-deferred growth makes the deferred annuity most attractive among the population. For example, if you have invested in a deferred annuity, you can delay your tax payment. Or for you, the applicable tax might be at a lower rate.

The following are some more advantages of deferred annuity:

1. Various Payout Options

You have the freedom to choose the payout for future payouts. These can be in the form of a lump sum, fixed-period payments, or lifetime steady income.

2. Payment Delays

Since throughout the fund accumulation period, the annuitant can delay tax payment, the funds can grow without any interruptions. This can result in a larger payout amount.

3. Easy Fund Additions to Deferred Annuities

With a disciplined saving mindset, annuitants can easily build the corpus amount over time. The flexibility to add funds anytime further makes it convenient.

4. Easy Withdrawal of Funds from Deferred Annuities

Although it is not recommended to withdraw money from such plans, since these carry the possibility of surrender charges, you can withdraw money from a deferred annuity plan during emergencies.

Disadvantages of a Deferred Annuity

While considering whether to invest in a deferred annuity plan, it is crucial to know that no plan is perfect. Although these types of long-term investments offer income options during retirement and have tax deduction benefits¹, they have certain drawbacks.

1. Complexity

There are tons of varieties of plans, and all these plans have diverse terms. Understanding all these terminologies sometimes increases confusion and leads to misalignment with the actual financial goal.

2. High Fees

The plans come with additional charges, such as administrative fees, mortality and expense fees, and surrender charges. These high fees can negatively impact the returns.

3. Illiquid

When an annuitant chooses to invest, he locks in the funds for at least 6 to 8 years. Moreover, early withdrawals trigger tax penalties and high surrender charges. So, accessing your funds becomes challenging.

4. Fees for Early Withdrawal

The surrender charges for early withdrawal are quite high. Even if you need to withdraw funds only 6 months before retirement, you will have to pay a 10% penalty. As a result, the value of the long-term retirement savings will decrease significantly. 

Who Should Think About Getting a Deferred Annuity?

A deferred annuity scheme is perfect for:

1. People who are nearing retirement (late 40s and 60s) expect to have a guaranteed income stream as a form of retirement income.

2. Individuals with a higher risk appetite can use indexed or variable annuities. These people are comfortable with market exposure and expect higher returns.

3. Since deferred annuity premiums qualify for tax deductions¹ as mentioned in Section 80C of the Income Tax Act 1961¹, people who choose to reduce their tax burden.

4. Those who look for long-term future payouts with flexibility.

5. A deferred annuity works like a personal pension plan. So, for freelancers, it is a safe choice.   

6. For people unwilling to take risks and who prefer capital protection and fixed returns, fixed and indexed deferred annuities are the best choice.

Summary

In a nutshell, with a disciplined investing habit, relevant information and careful planning, you can invest in a deferred annuity. Before investing, consider factors such as internal rate of return (IRR), inflation rate and deferred annuity taxation. It is crucial to talk to a professional to make an informed decision. Talk to your insurer while making the binding contract. They will assist you in growing your money free of tax and market volatility.

FAQs on Deferred Annuity

Q: What do you mean by deferred annuity?

Deferred annuity is a life insurance plan meant for retirement. It allows you to contribute small amounts during your working days to get a fixed income at a future date you choose.

Q: What is the deferred annuity formula?

The deferred annuity formula is P × [1 – (1 + r)-n] / [(1 + r)t-1 × r] where P is annuity payment, r is the interest rate, n is the number of periodic payments, and t is the period of delay.

Q: What is the difference between an ordinary annuity and a deferred annuity?

The main difference between an ordinary annuity and a deferred annuity is when the payouts begin. In ordinary annuities, the payment is at the end of a period. It could be monthly or yearly like pension payments, rental payments, etc. In deferred annuities, payments begin from a future date chosen by the annuity purchaser.

Q: What are examples of deferred annuities?

The best example of deferred annuities is retirement plans. The investor contributes during working days to receive a fixed income after retirement, which could be after decades. Meanwhile, the accumulated funds earn interest to render higher payouts.

Q: How does a payout annuity differ from a deferred annuity?

In payout annuity you receive immediate income after a lump sum is invested. In a deferred annuity the payouts are on a pre-decided future date allowing the investment to earn interest during the deferral period before the payout commences.

Q: Can I Withdraw from a Deferred Annuity?

Yes, withdrawing money from a deferred annuity is possible. However, there are chances of getting tax penalties, experiencing loss of tax-deferred growth and facing surrender charges. 

Q: How Long Does a Deferred Annuity Last?

Depending on the type of plan an annuitant has chosen, a deferred annuity lasts. It can last for a whole lifetime or until the predetermined period expires.

Related Articles

• What is Annuity - Meaning, Definition and Types | HDFC Life
• Annuity Plans for National Pension System – NPS
• Features of Annuity Plans: Key Benefits Explained | HDFC Life

Reference links:

1. https://www.forbes.com/advisor/retirement/deferred-annuity/

2. https://cleartax.in/glossary/annuity