Annuities- How beneficial are they for your retirement?

Post-retirement, for many individuals, health conditions may become fragile, and medical bills may pile up. This can dry up any savings corpus built over the years. Also, if a corpus has been exhausted due to certain financial goals in the past, the resulting burden post-retirement might be huge. In cases like this, an annuity can help. An annuity is a plan built to help you to get regular payment for life after you make a lump sum investment. A life insurance company invests your money and pays you back the returns generated from it.

How do annuities work?​

There are different types of annuity plans, and they work in different ways:

• Annuity payable for a guaranteed period: You will receive payment for a guaranteed period, say around five, ten, or fifteen years, even if the annuity buyer dies. The annuity will stop either upon the death of the annuitant or after the completion of the guaranteed period, whichever is later.
• Lifetime income annuity: You receive regular annuity pay-outs (monthly/quarterly/yearly) from the scheme till you are alive. The annuity will stop after your death. A very straightforward plan, lifetime income annuity is one plan you don’t need to worry on the pros and cons of.
• Lifetime annuity with return of purchase price: You continue receiving annuity payments regularly until you die. After your death, the insurer returns the initial amount used to purchase the annuity to your nominee. It is a good option for those wanting to leave a legacy behind.
• Inflation-indexed annuity: There will be a rise in the annuity payable at a certain rate, maybe 2% or 5%, every year. The increase may not be linked to the actual inflation rate, but it will help take care of an increase in expenses.
• Joint life survivor annuity: It keeps paying as long as either you or your spouse is alive.
• Joint life annuity with return of purchase price: You will receive payment till you or your spouse is alive. In the case of the death of both individuals, the nominee is entitled to get the initial invested amount.

Now that you understand how annuities work based on their different types, you don’t have to worry about their pros and cons. All you have to do is choose the plan that applies the principle of annuity best for your situation.

How beneficial are annuities in retirement?

An annuity can be considered as a substitute for your salary after retiring. It plays an important role as one of the components of your regular inflow of money during retirement. Some of the best annuity plans in India are offered by life insurance companies, such as SBI Life Insurance Company and come with a variety of options from which you can pick your preferred choice.

To understand their role better one has to look at the benefits of purchasing one. When you opt for the best annuity plan in India, you can reap the following benefits:

• Providing a sense of security - An annuity comes with the assurance that you will receive money each month for the rest of your life. The insurance company figures out how to make the money last as long as you live, so you don't have to worry about it.
• Removing reinvestment risk - In India, we are structurally moving towards lower interest rates. The risk arises when you go to reinvest the principal and get a lower rate of interest. However, once you invest in an annuity, you are guaranteed the same rate of pay out for life.
• No cap on investment - While there are investment caps on other retirement schemes, there are no such caps on annuities.

An annuity plan is built to help you retire well with its sense of security that it brings to the table with the regular payments from your investment. Purchasing an annuity plan is the step you take today to make the future more secure tomorrow.