What is Retirement Annuity: Working Principle, Types and Tax Benefits
Many individuals wish to follow their hobbies, plan a trip, or pursue other dreams after retirement. Bringing those dreams to fruition without continuous income might become quite challenging.
To that end, one can always count on a retirement annuity for consistent income throughout their life. With the help of these funds, retired personnel can meet daily needs as well as maintain their lifestyle.
In the following sections, you will find details on retirement annuity, how it works and more.
What Is Retirement Annuity?
There are several financial plans for retired individuals available in India. Among them, annuity plans stand out due to their stable and regular benefits. One can invest a lump sum in this plan, which gets further invested by the insurance company, and the generated returns serve as an income for the retired policyholders.
Furthermore, retirement annuities offer flexibility in pay-outs, meaning you can choose an appropriate pay-out option as per your requirement. Now that you know what retirement annuity means, let's check out its working principle.
How Does a Retirement Annuity Plan Work?
To understand the working principle of annuity plans for retirement, you might want to consider the following points:
Policy members need to make lump-sum investments or pay in instalments to receive benefits under this plan.
The annuity for retirement will generate income that can be provided monthly, quarterly, or annually.
Several factors, including the annuity tenure, determine the pay-out amount.
One can opt to get these payments for the rest of their life or for a fixed period.
The income generated from annuities depends on the type of plan you choose. For instance, there will be guaranteed pay-outs for a fixed annuity, whereas, for variable annuities, the pay-out depends on the performance of the annuity's underlying assets.
Before going into the depths of retirement annuity plans, one should note that there are more than 5 annuity types available in India. Each of them has a unique set of features.
You can continue reading to know more about the differences between such annuity plans and what can be an appropriate choice for you.
Fixed Vs Variable Retirement Annuities
Given below is a table showing differences between a fixed and variable retirement annuity:
| Fixed Retirement Annuities | Variable Retirement Annuities |
|---|---|
| In this annuity type, policyholders receive fixed payments throughout the tenure. | Policyholders can obtain variable pay-outs by choosing this annuity plan. |
| Generally, resources are put into fixed pay instruments. | This allows you to invest in a number of instruments. |
| It generates stable and consistent returns due to investment in fixed instruments. | It pays you a certain income amount depending on the performance of the selected investments. |
| There is little scope of development for the chief amount invested. | As the chief amount is invested across markets, it may increase in times of bullish market trends. |
| No risk associated with this type of annuity plan. | As this annuity plan is market-linked, there are some risks of investing in this type of plan. |
Immediate Vs Deferred Retirement Annuities
To know the differences between immediate and deferred retirement annuities, you can consider following the table given below:
| Immediate Retirement Annuities | Deferred Retirement Annuities |
|---|---|
| In this type of annuity, policyholders can start receiving benefits right from the beginning of the investment. | This annuity type offers regular income after the completion of the accumulation phase. |
| There is no accumulation phase in this plan. | A deferred annuity's accumulation phase starts from the day of investment. One can start accumulating funds and build a retirement corpus. |
| To apply for an immediate annuity plan, individuals need to make lump-sum investments. | In this annuity type, one can pay premiums in instalments. |
| It is ideal for retired personnel who are in urgent need of funds. | Individuals who can start building a retirement corpus from an early stage can find this annuity plan helpful. |
Apart from this, while choosing annuity plans in India, you might want to consider factors like retirement annuity rates, tax benefits, etc.
Tax Benefits of Retirement Annuity
Under Section 80CCC of the Income Tax Act, 1961, individuals paying a lump-sum amount for an immediate annuity plan are eligible for tax exemptions. One can claim a maximum exemption of ₹1.5 lakhs under this section.
Furthermore, annual incomes generated from annuity pay-outs up to ₹5 lakh are tax-free. An additional tax benefit is available under the "Salaries" heading as per the government rules. Under this heading, one can claim a standard deduction of ₹50,000 or the pension amount, whichever is less.
Other than this, the returns of your investments are taxed as per the Income Tax slab. Therefore, you might consider knowing about the retirement annuity tax rates before investing.
Now that you know everything about retirement annuity plans, the differences between various plans, taxation and more, you can make an informed decision before proceeding this way. You can also figure out the best retirement annuity plan for you in this regard.
Frequently Asked Questions
What are the advantages of investing in variable retirement annuity?
Variable annuities come with the following lucrative benefits:
- Increased pay-out
- Death benefit
- Lifelong pay-outs
- Protects your investment
Why should I invest in retirement annuities?
At the time of retirement, you might require a regular source of income over and above your pension amount. Considering economic inflation, you may face shortage of funds at any time. In that case, the returns from annuities can cover your financial crunch.
Can I get an annuity plan for myself and my wife?
You and your wife can benefit from joint survivor annuity plans by receiving regular returns. In the unfortunate event of your or your spouse's death, either one of you will continue receiving benefits. In the absence of both of you, a nominee of your annuity plan will receive the compensation.
What are the annuity plans available in India?
Some of the annuity plans available in India are ICICI Prudential Immediate Annuity Plan, IDBI Federal Guaranteed Lifetime Income Plan, India First Immediate Annuity Plan, Kotak Lifetime Income Plan and more.