Annuity is often confused with pension though there is a difference between the two. Pension is paid-out in the form of annuity and qualifies as an example of annuity. Let’s understand what annuity is –
What is an Annuity?
Annuity is a series of periodic payments which are given out at regular intervals from a lump sum corpus. Thus, annuity pay-outs secure a source of regular income. A pension is a type of annuity which pays regular incomes till your lifetime.
Types of Annuity
There are two types of annuities in India based on the period when annuity is paid – deferred and immediate.
- Deferred annuity :- Under this type of annuity, you pay a lump sum amount and the annuity pay-outs start after a specified duration. Thus, annuity payouts are postponed for a certain date and the duration for which it is postponed is called the deferment period.
- Immediate annuity :– Under immediate annuity, you pay lump sum money to buy the annuity. Thereafter, annuity pay-outs start immediately from the following month, quarter, half-year or year. You have to choose the annuity frequency and annuity pay-outs would be paid on every subsequent frequency till your lifetime.
Besides these basic types of annuities, there are other types of annuity depending on the annuity payout. These types include the following –
- Life annuity :– Under this type of annuity, annuity payouts are given till your lifetime. In case of your death, the annuity payments stop
- Life annuity with return of purchase price :– In this variant, annuity payouts are paid till your lifetime. On your death, the purchase price with which you bought the annuity is refunded back to your nominee
- Annuity certain :– Also called guaranteed annuity, the annuity pay-outs under this variant is paid out for a guaranteed period (say 5, 10, 15 or 20 years). After the guaranteed period is over and you are alive, the payouts are paid for your lifetime. In case of death during the payout period, the annuity pay-outs would not stop. They would continue till the guaranteed period and then stop.
- Increasing annuity :– In this case, the annuity pay-outs increase every year or every frequency by a fixed rate. The rate might be 5% or 10% and the increase might be at a simple rate of interest or compound rate of interest.
- Joint life annuity :– Under this annuity, a married couple is covered for receiving annuity pay-outs. The individual who buys the annuity is the primary annuitant while the spouse is the secondary annuitant. An annuity is paid for the lifetime of the last surviving annuitant. This means that if the primary annuitant dies, the annuity payouts don’t stop. They continue for the lifetime of the spouse who is the secondary annuitant. Similarly, if the secondary annuitant predeceases the primary annuitant, annuity pay-outs would be paid till the lifetime of the primary annuitant. Thus, annuity payouts are paid for the lifetime of the last surviving annuitant.
- Joint life annuity with return of purchase price :– Under this variant, an annuity is paid till the lifetime of the last surviving annuitant just like in case of joint life annuities. The only difference is the return of the purchase price on the death of the last annuitant. When the last surviving annuitant dies, the annuity pay-outs stop and the purchase price is refunded back.
Annuity payments ensure a steady flow of income during your retirement years. The different types of annuities also ensure that you can secure a steady income for your spouse even if you die early. Thus, annuity is a very good option for retirement funding. You should understand the different types of annuities and then choose a variant which is most suitable for your retirement planning requirement.