Want regular income after retirement? How annuity plans work and what you should know about them

Retirement planning is not just about building a large corpus that looks sufficient on paper. It is also about ensuring that the money lasts throughout your lifetime and provides a regular income after you stop working.

This is where annuity plans can play a role, by converting a lump sum into a stream of payments over a specified period or for life, depending on the plan. Though it sounds like a suitable approach, there is a trade-off.

Once you buy an annuity, your money generally becomes less flexible, as the lump sum is converted into a regular income stream. This makes it important to choose an option that suits your retirement needs and financial circumstances.

How does annuity work?

First, an individual is required to make a lump sum investment in the annuity plan offered by an insurance company, which in turn, will provide them with payments on future dates. This can be paid on a monthly, quarterly, or annually basis.

The annuity or pension payout is determined by several factors, including the tenure of the annuity. You can opt to get the pension payments for the rest of your life or a fixed period.

According to the Pension Fund Regulatory and Development Authority's (PFRDA) analysis of annuities, the annuity payouts can also be affected by factors including prevailing interest rates, life expectancy and whether you choose single or joint life and return of purchase price.

The annuity or pension income also depends on whether you have opted for a fixed annuity that is a guaranteed pay-out or variable annuity, that is, a pay-out stream determined by the performance of the annuity's underlying investments.

For example, suppose a 60-year-old man invests ₹10 lakh in an annuity plan after retirement. Depending on the plan’s terms, the insurer may pay a fixed monthly pension for the rest of his life. If the man chooses a joint-life annuity, the payouts will be given to his spouse after his death. Alternatively, a return-of-purchase-price option will return the initial investment to the nominee.

You can choose between these annuity plans

Here are the options available under annuity plans that an individual can choose from when planning for regular income after retirement:

• Deferred annuity plans: These plans essentially help individuals to save for the future where they let you invest regularly to first build a corpus and once you retire you get a pension from this amount.
• Immediate annuity plans: This type of plans is for people who want to invest at a later stage of life. With an immediate annuity, you hand over a lump sum cash to the insurer and in exchange, the company starts making your monthly payment like an income stream.

• Annuity for life: This is one of the simplest options, in which you receive regular income for as long as you live. After the investor's death, the payments stop. As the insurer is not required to return the original purchase price to the investor's family, this particular plan can offer a higher pension than comparable options that return the purchase price.
• Annuity with return of purchase price: If you want to leave money to your spouse or family after your death, you can choose an annuity plan that returns the purchase price. You receive an income for life and after death, the original purchase price is returned to the legal heirs. However, this plan usually offers lower regular pension as compared to an annuity plan without return of purchase price.
• Joint-life annuity: This option allows an individual to secure a regular income for both themselves and their spouse. The annuity is paid to the primary investor during their lifetime and, after their death, continues to the spouse as per the terms of the plan. Depending on the option chosen, the purchase price may also be returned after both annuitants die. This can help ensure that the surviving spouse continues to receive financial support.