Immediate Annuity Plans – What are they?

Imagine you are 60 years old and have Rs. 1 crore as savings including Bank balances, FD, MF, shares, etc. and excluding your house and land.  Your income has stopped because you have retired from service now.  You now want to use your savings to generate income every month, to take care of your own and your spouse’s regular living expenses.  This is where an annuity plan comes in.

Go to a life insurance company and deposit the Rs. 1 crore into an annuity (also called Immediate Annuity) plan.  They will give you an annuity of say Rs. 60,000 per month (indicative figure only).  This amount is called immediate annuity.  It could be received monthly, quarterly, half-yearly or yearly.  A lot of life insurance companies in India today offer this product.

How an immediate annuity plan works is represented on a timeline below.

Immediate Annuity plans are not for the less than 55 year olds.  They should look for other avenues to invest their funds and maximize their corpus before they turn 55 (or 60).

1. Corpus (investment amount e.g. the Rs. 1 crore in the example below) – higher the corpus, higher is the annuity amount
2. Age at which you start the annuity – later you start better is the annuity (because the no. of years expected to live reduces)
3. Gender – women get lesser annuity since they are expected to live longer than men
4. Type of annuity (Fixed, Variable, Joint-Life, Survivor, etc.) and the element of Guarantee – Read “Types of annuities available in India”
5. Current Interest Rates – especially for long-term Govt. bonds and securities.  Higher the prevailing rates, better is the annuity amount
6. Payout method – monthly, half-yearly, yearly, etc.
7. Timing of Payout – start of the period, or end of the period.

Types of Annuity Plans

Immediate, Deferred, Variable, Guaranteed, Life Annuity, etc. – there are several types and since you are going to invest a substantial part of your life savings into this plan, I strongly recommend you take an informed decision as to which annuity plan is the one that fits your current and future needs.  Please read “Types of Annuity Plans available in India” before you take the decision to buy your annuity plan.

• The annuity (Rs. 60,000 in the example above) is GUARANTEED till the end of your life
• The corpus (Rs. 1 crore) is as SAFE as a fixed deposit in a bank since it is generally invested only in Govt. Securities and Govt. Bonds
• After your death, you have an option to provide the same annuity to your SPOUSE if she/he is alive, till her/his death
• You also get the option of leaving behind a LEGACY – the Rs. 1 crore is given back to your nominee(s) after your spouse’s death

The Immediate Annuity plan can be a great replacement of income for retirees.  It ensures that their savings are protected and it also provides the comfort of having a monthly inflow to manage regular expenses which do not stop.  The minimum that you can invest in an Immediate Annuity plan is generally Rs. 1.50 lakhs.

However, remember that most annuity variants lack liquidity and flexibility.  In case there are other better options that come up once you start receiving your immediate annuity, switching may be too expensive or sometimes not allowed.  Also, if you or your spouse suddenly needs some extra money for a medical emergency, annuities may not allow a lump sum withdrawal. So, don’t put all your savings into an immediate annuity plan, just about 50% is fine.  The other 50% is better put into a flexible and liquid instrument such as an FD, to manage emergency funding or gifting.

You will hear mention of options such as Debt Mutual Funds, Fixed Deposits, Recurring Deposits, Debentures, Corporate Deposits, etc., many of which come with the probability of higher returns, but…

1. They could be cumbersome to manage. I have seen how actively my Dad managed his funds.  But in his own words, at the age of 60-65 and beyond, one would prefer enjoying one’s golden years rather than actively manage funds.  One’s health may also not permit one to do that either.
2. They may not offer a guarantee for a long period of time
3. And some of them may not even have a capital guarantee, you might lose the money you invested, something you can’t afford when you are racing with inflation.

Yes, the immediate annuity rates could be a little lower than what you could ideally have got, but I am of the view that at the age of 60 and beyond, there is no question of taking any risk with your money (you would have done a lot of it from the age 25 to 60, and hopefully reaped the benefit of higher returns).  At higher ages, I would stick to financial instruments that invest in Govt. securities and bonds only, and preferably come with a Guarantee.

Immediate Annuities are very convenient and therefore preferred by those who value it.

Yes, there is the Post Office Senior Citizens Savings Scheme which generally offers slightly better rates (currently 9.30% paid out quarterly) than most Annuity plans from Life Insurance companies.  However it has a maximum limit of Rs. 15 lakhs per individual.  There is also the Post Office Monthly Income Plan which also has attractive rates (currently 8.50% paid out monthly), but again has a maximum limit of Rs. 4.50 lakhs only, per individual.  Please note that income from both these products are also taxable like from an Annuity plan, but still if I were you, I would utilize the complete benefit from these 2 schemes and then invest in an Immediate Annuity plan.

Annuities have 3 kinds of costs – administrative costs, commissions and insurance company profits.  It is strongly advised that you go in for the online annuity purchase since that is definitely cheaper than the one sold by an agent.  So we can actually get a higher annuity if we buy it over the internet.

All annuities are taxed – the amounts received are added to all other income for the year.  Regular income tax rules will apply.

To now proceed with buying your annuity, read “How to compare and choose an Immediate Annuity plan?”