The Buyt Desk
One should plan finances for retirement so that one can lead a quality life even when not earning. An annuity plan is one such arrangement made for retirement.
Retirement plans are financial policies to be bought when an investor is young and earning. These policies make it possible for you to plan for the future, post-retirement when you no longer have a steady income. There are two types of plans –
Pension Plan – The investment plan which allows you to methodically save money over the years and once you retire it will give you a steady income. A pension plan allows you to maintain your financial independence even after your income stops. Also, it helps you to deal with inflation while not compromising on your standard of living.
Annuity Plans – The investment plan which allows you to secure your financial future for the rest of your life with regular income payments. The annuity plans have terms and conditions based on the plan you choose. During an accumulation phase, you put money into the policy periodically. On retirement, with these accumulated funds you can purchase an annuity that will provide you with regular payments as per the plan.
What is an Annuity plan?
An annuity plan is a financial product that provides you with guaranteed regular payments after making a lump sum investment. Your investment is reinvested by the life insurance company and the returns generated from it are paid back to you in form of payments. You can consider this as a pension payment that you make to yourself. You have the flexibility to choose the frequency of payment based on your needs – monthly, quarterly, half-yearly, or yearly.
Retirement is stable and happy only when you have made different investments and have generated various income-generating options. An annuity is one such option and the final stage of a retirement plan. This allows you to draw a regular income even after your retirement. You can mretireitigate the risk of outliving your savings with help of the annuity plans. The annuity plan aims to convert your retirement corpus into a secure and long-term income.
How buying an Annuity Plan will help save for retirement?
As already discussed, annuities create a guaranteed income stream for the holder and his/her spouse. No other financial product can give guaranteed income over a lifetime. Annuities offer the following key benefits –
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Safe and Reliable Income – Just saving will not help sustain your standard of living after retirement. The savings should also grow multiple folds by your retirement time. An annuity is a financial instrument to create wealth in the long term. It is less volatile and less risky when compared to other wealth-creating instruments. You can decide the frequency of payouts based on your needs – monthly, quarterly, half-yearly, or yearly streams. It offers assured income streams for you and your spouse’s lifetime. Annuity plans can be used to return the purchased corpus to your nominee after your and your spouse’s demise.
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Wealth Boosters – Insurance investments gain from the movement dynamics in the financial markets. It is designed to give superior returns in the targeted period. Higher annuity installments can be availed for the increased purchase value. Online purchases of an annuity will increase the annuity rate by 2%. For NPS subscribers purchasing through the sales team or online channel will increase the annuity rate by 1%.
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Loyalty Additions – Life Insurance offers an increase of annuity rate by 1% when purchased by existing policyholders of the company.
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Automated Portfolio Strategies – Few plans allow you to build your retirement corpus and receive pension income from it. This way you can benefit from multiple investment options like debt and equity instruments. This is based on automated or predetermined allocation strategies. When young you can go for aggressive investment in equity-oriented funds and move to safe debt and liquid funds from equity as you grow old.
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Tax-Savings under Section 80C & 10(10D) – Under Section 80C, the amount paid towards the premium up to Rs. 1.5 lakhs is deductible. Few plans also allow tax exemption on the amount withdrawn under Section 10(10D). The partial withdrawals made after retirement will be tax-free. The tax saving works when the annual investment in the plan is less than 10% of the life cover and the maximum annual investment in ULIP plans does not exceed Rs 2.5 lakhs (bought after 1st Feb 2021).
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High Liquidity – Withdrawal is allowed under the “Special Surrender Value” status. When the specified conditions are met, you are allowed to withdraw your money.
