Ch. 4: What are the Different Types of Annuity Plans For Retirement

The future looks bright for the next generation of Indians – we are living longer, with life expectancy having risen from 59.6 years in 1990 to 70.8 years in 2019. We are also approaching retirement with a renewed sense of purpose.

So what does that mean about the way we save for retirement? With more life to look forward to and more passions to pursue, it's important that we build a nest egg that lasts a lifetime. That’s where Annuities come to our rescue.

What Are Retirement Annuity Plan?

Annuity is simply a chain of periodic payments that are made to you in a time interval. You pay premiums while you’re earning, and receive an annual source of income, after retirement. Annuity Plans, thus, are a type of Retirement Plans. They make sure you don’t outlive your money, and enjoy the simplicity of regular payments - even when you don’t earn anymore.

Different Types of Annuity Plans

There are several different ways to categorise annuity plans. For instance, they can be categorised into types by the way you pay your premiums, the way you receive your payout, and how the annuity grows in value.

Let’s take you through the various types, one by one.

Based on how you pay your premiums

1. Single Payment Annuity Plans

As the name suggests, it is a life insurance plan where you make a single, lump sum investment. And then when you retire, you receive a steady stream of income. The steady source of income (annuity amount) will be calculated at the time of purchasing the annuity plan. This retirement income could be for a specific period of time, or could be extended to your entire lifetime. It’s also known as the Single-Premium Annuity Plan.

2. Limited Payment Annuity Plans

It is a life insurance plan that helps you systematically accumulate funds over a period of time, and then convert it into guaranteed income once you retire. This is also known as the General Annuity Plan. In these plans, you make regular payments in the annuity plan till the end of the accumulation period. During this period, the payments that you make under the plan get accumulated.

Let’s take a comparative example.

Brishti, 45-year-old, is a corporate employee who gets a regular salary, and wants to retire at 60. While Nandana, 60-year-old, is a businesswoman who has just retired and received a large lump sum amount from her investments in a Provident Fund. Both of them want to invest in an Annuity Plan, and secure their future.

Let’s see the type of plan they should individually go for.

Based on who can be covered

1. Single Life Annuity Plans

Here, you are the only policyholder, and the annuity will be paid only to you.

2. Joint Life Annuity Plans

Here, you can add your spouse to the same annuity plan and jointly hold the policy. Once you or the primary annuitant dies, your spouse or the secondary annuitant will continue receiving the annuity amount. The secondary annuitant can receive either 100% of the annuity amount or 50% - depending on the product.

Based on how you want your annuity to grow

1. Increasing Annuity Plans

Here, the annuity amount increases at a fixed rate annually. You can choose to receive an increasing annuity amount, growing at a simple rate of 3% or 5%. For instance, Kanan, 45-years-old, is stressed about his retirement. He fears that due to the rising expenses and market inflation, he wouldn’t be able to maintain his lifestyle when he retires at 60. This is why he should go for an Increasing Annuity Plan. He can make his annuity increase by 5%, and receive payouts that will help him maintain his lifestyle and fulfil his post-retirement goals.

2. Fixed Annuity Plans

In these plans, the annuity amount remains fixed for the entire payout term. So, it provides you with a fixed income post-retirement without any change till the end of the plan

Based on when you receive the payouts

1. Immediate Annuity Plans

Here, you can choose to start the payout immediately, i.e., right after you have completed the payments. You can consider investing in these plans if you’re nearing retirement.

2. Deferred Annuity Plans

Here, you can choose to start the payout after a few years of making the payment(s), like after 5, 10, or 15 years. This period is known as the deferment period. Deferred annuity plans are a great option if you don’t need a retirement income immediately - and if you still have a few years till retirement.

Based on how long you receive the payouts

1. Life Annuity Plans

They guarantee you an income stream for the rest of your lifetime.
For instance, Ved, 45-years-old, buys an Annuity Plan and decides to invest Rs. 2 Lakhs (without taxes) every year for 15 years, until he retires at 60. He wants to receive the annuity lifelong after he retires. In this case, Ved can buy a Life Annuity Plan. The insurer will continue the annuity payouts for as long as he lives.

2. Certain Annuity Plans

Here, you can choose to receive the annuity amount for a specific period of time - say 10 years or 15 years.
Taking Ved’s example again. If he wants to receive the annuity for only 20 years after he retires at 60, he’ll have to buy a Certain Annuity Plan and choose the payout period as 20 years. The insurer will then make the annuity payouts to him until he is 80.

Annuity plans can help you protect what matters to you - as you work toward living a long and fulfilling life in retirement. Depending upon your needs, you can select a plan among the various types available in the market. You can also combine some of them, and make a plan that’s perfectly tailored for you.

And now, you need to figure out how you can customise the plan you’ve chosen to best suit your requirements. Our next article will help you with just that.