Annuity Deposit Schemes: Lifelong Retirement Income Solution

With a lack of financial knowledge, many of us become victims of insurance calls from those seeking to push us to sell unsuitable products. These sales tactics often result in substantial commissions for agents. As financial products, particularly insurance-related ones, continue to be marketed as 'push products,' it is increasingly imperative for individuals to acquire the knowledge necessary to navigate these complex landscapes effectively. It is more useful to understand the right age to buy the right insurance product to secure a financially stable and worry-free life

In a world where financial stability during retirement is a top priority, annuity deposit schemes have emerged as a promising solution to ensure a steady and guaranteed income stream in one's later years. Aneesh Khanna, Head of Products & Segments at HDFC Life, said, "Annuity is the only instrument available in the market that is pegged to one's longevity and provides a lifelong income stream at a guaranteed rate of interest locked in today. Typical deposit instruments like Fixed Deposits have a maximum tenor of 10 years and are exposed to reinvestment risk. However, an Annuity contract is a lifelong instrument that provides steady income with the protection of capital after retirement.

As one grows old, they have limited ability to track markets and actively manage funds. Effortless, hassle-free, and timely pension payouts directly credited to one's bank account make it seamless, like a 'Salary credit' post-retirement. Annuity brings in convenience at older ages with an option of guaranteed lifelong income for both self and spouse," he added.

On the other hand, Kamlesh Rao, MD & CEO of Aditya Birla Sun Life Insurance, explained that with the rising cost of living and increasing life expectancy, annuity schemes are a powerful tool to maintain a comfortable lifestyle while preserving your hard-earned savings. The attractive feature of regular payouts, along with the potential for customization, makes annuity plans a compelling choice for long-term financial planning.

Why one should buy

A retiree faces the risk of outliving one's retirement corpus or finding oneself needing to reinvest after a drop in interest rates. Since the annuity deposit scheme does not have a maturity amount, the individual does not run the risk of reinvestment. "Such schemes are ideal in higher interest rate scenarios during which medium to long-tenure investments can be made. Since the payouts are equated in nature, one may plan the investment in the deposit in such a way that it aligns with one's post-retirement monthly expenses," added Rao.

The interest earned from annuity plans is treated as income and is subject to taxation as per the individual's income tax slab. However, there are potential tax benefits under Section 80CCC of the Income Tax Act, offering deductions for the amount invested in certain annuity plans. These deductions, coupled with the potential for minimizing tax liability, make annuity deposit schemes an attractive proposition for tax-conscious investors.

Madhu Burugapalli, Sr. EVP & Head of Product, Bajaj Allianz Life Insurance, represented retirement as a fresh beginning, not an ending. With their dependable post-retirement income, they can transform lifelong aspirations into reality, regardless of their job status. With a lump-sum payment, you can secure a guaranteed regular income for life.

Annuity deposit schemes in India are considered the ideal retirement plans for individuals looking for a regular stream of guaranteed income throughout their lifetime. Vivek Jain, Head - Investments, Policybazaar.com, said that these schemes offer pension rates that can go as high as 9 per cent, which remains fixed for the entire duration of the policy after the first premium is paid. He added "This protects customers from reinvestment risk, which is not the case with fixed deposits where the rates are locked only for a maximum period of 10 years".

Right Age To Buy

According to most experts in the insurance sector and their internal research, an individual starts thinking about his or her retirement as late as their 50s. "At HDFC Life, we have a plethora of options like deferred annuity, inflation-linked annuity, annuity with early return of principal/return of principal in parts, joint-life annuity, return of principal on the diagnosis of critical illness, and limited-pay annuity. A limited-pay annuity, which allows you to lock-in interest rates by paying just a fraction of the premium, is ideal for people who do not have an accumulated corpus at their disposal and are still working," explained Khanna.

Annuity plans, well-known for their safety and reliability, stand as steadfast custodians guarding against the uncertainties of life. These plans extend a promise: a promise that your investment will metamorphose into a constant stream of income, defying market fluctuations and economic turbulence. As time passes, this consistent income flow becomes a lifeline, enabling you to relish your post-retirement life without compromise. "By commencing your annuity investments at this juncture, you're not just preparing for retirement; you're crafting a safety net that ensures your golden years gleam with the brilliance of your hard-earned efforts," said Rao.

To benefit from multiple interest rate cycles, it is advisable to own multiple annuity products with guaranteed interest rates locked in for life. It is essential that both the annuitant and spouse have a lifelong income stream to take care of healthcare and other expenses, with an element of tax-efficient legacy planning for the next generation, suggested Khanna.

For customers who still have time before retirement and want to create a guaranteed pension 5-10 years later, there are regular pay deferred annuity plans available. These plans allow the customer to invest for five to 10 years and then choose the period after which a guaranteed pension will start being paid to the customer. "For customers who are planning to retire in some time or are already retired, they can choose to invest a single lump sum amount and then choose to get the guaranteed pension immediately or after a few years as per the need," said Vaibhav Kumar, Head of Product Management at Max Life Insurance.

Since the budget announcement regarding taxation on premiums exceeding Rs five lakh, the focus of insurance companies has shifted to annuity plans. "These plans are gaining preference, especially among higher-aged individuals and high-income earners. Depending on the annuity options chosen, returns from annuity plans can sometimes outpace traditional savings plans, making them a more attractive option for certain customers," added Kumar.

While explaining about the taxation part of schemes, Jain, said, "The Pension amount is taxable as per the prevailing tax slabs and the tax scheme (old or new as opted by the user) during the financial year the pension amount is received. Individuals can also claim an additional tax benefit of a maximum of Rs. 1.5 lakhs yearly under Section 80c against the premium paid for Annuity plans under the old Tax Regime".

The experts said that annuity deposit schemes have emerged as a compelling solution for Indians seeking financial stability during retirement. With the ability to customise, tax benefits, and a focus on long-term financial security, annuity plans hold immense potential in helping investors achieve their retirement aspirations.