Planning for future is the most important thing for a majority of us. As annuities score big on the whole saving-for-future agenda, it becomes important to understand its meaning, and advantages.
What is an annuity?
An annuity is a fixed amount paid to somebody each year, usually for the rest of his/her life. This covers rent paid at the end of the month, home loan EMIs, car loan EMIs, etc. In insurance policies, an annuity is the money policyholders receive from their insurance policy in exchange for regular payments in the form of a lump-sum or a series of payments.
Typically used in retirement planning, an annuity is an insurance product issued by life insurance companies and purchased by policyholders to reach long-term financial goals.
Types of annuities
The market is full of a wide variety of products, which can be further customized to have a tailor-made monetary instrument suitable to your individual requirements. Typically, annuities are of the following types:
Immediate annuity
Immediate annuities are instruments that provide income payments for the life of the insurance holder, or for a specified period with income payments beginning within a year of paying the premium.
Deferred annuity
Deferred annuities provide income for life of the annuitant or for a specified period, with the first payment made a year or more after paying premiums.
Fixed annuity
For a fixed annuity, the company guarantees, in the contract, that the person will earn no less than a minimum rate of interest set in the contract.
Variable annuity
In a variable deferred annuity, the insurance company puts the premiums into separate accounts. There is no
guarantee that the annuitant will earn any return on investment and there is a risk of losing money. Many variable annuities offer guaranteed death benefits or guaranteed living benefits for an additional fee.
Benefits of annuity products
An annuity provides you with a predictable and tax-deferred monetary growth. It also ensures that your family members are not left in fiscal distress in case of your demise.
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Annuity products available in India
The following are the generic annuities offered by service providers:
- Annuity payable for life at a uniform rate to the annuitant only.
- Annuity payable for 5, 10, 15 or 20 years and thereafter as long as you are alive.
- Annuity for life with return of purchase price on death of the policyholder.
- Annuity payable for life increasing at a simple rate of 3% p.a.
- Annuity for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
- Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant.
- Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of the annuitant and with return of purchase price on death of the spouse. If the spouse predeceases the annuitant, payment of annuity will cease after the death of the annuitant and purchase price is paid to the nominee.
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How to calculate annuity?
The future value of an annuity is calculated using the formula:
Future value of annuity=Â C (((1+i) ^n – 1)/i)
C: This represents the regular payment or contribution made at regular intervals (monthly, annually, etc.).
i: It is the annual interest rate, expressed as a decimal. For example, if the annual interest rate is 5%, i would be 0.05.
n is the number of payment periods or years.
The formula essentially calculates the future value of a series of equal payments over time, considering the interest earned on those payments. The interest as a decimal is added to one and raised to the power of n.
Tax on annuity
India’s income tax law views annuity payments as an income and consequently imposes tax on the amount received by the policyholders, depending on their tax slab.
Currently, annuity is taxed both at the entry and exit points. However, you will not pay income tax on the earnings from your annuity investments till you begin making withdrawals or getting periodic payments. Also, withdrawals before the age of 59 and a half years may be subject to an additional 10% tax.
FAQs
What is an annuity?
According to the Pension Fund Regulatory and Development Authority (PFRDA), an annuity is a financial instrument, which provides a regular payment of a certain amount on monthly/quarterly/annual basis for the chosen period, for a given purchase price or pension wealth. In simple terms, it is a financial instrument, which offers monthly/quarterly/annual pension at a specified rate for the period you chose.
What are the annuity service providers under NPS and what are their names?
Currently, the following life insurance companies are licensed by the Insurance Regulatory and Development Authority (IRDA) to act as annuity service providers:
(1) Life Insurance Corporation of India
(2) SBI Life Insurance Co. Ltd.
(3) ICICI Prudential Life Insurance Co. Ltd.
(4) Bajaj Allianz Life Insurance Co. Ltd.
(5) Star Union Dai-ichi Life Insurance Co. Ltd.
(6) Reliance Life Insurance Co. Ltd.
(7) HDFC Standard Life Insurance Co. Ltd
In case of the death of the subscriber before attaining the age of 60 years, what will be the benefits payable and who will get the benefits?
In the unfortunate death of the subscriber, the entire accumulated annuity would be paid to the nominee/legal heir of the subscriber.
What are the factors determining the annuity income when you buy an annuity?
The size of the corpus determines your monthly annuity/pension that you receive. The higher the accumulated pension wealth or corpus used for the purchase of an annuity, the higher would be the monthly pension received. Besides, amount of annuity may vary according to the type of annuity variant selected by subscribers.
What are the applicable provisions for withdrawal of the accumulated pension once I turn 60?
At least 40% of the accumulated annuity needs to be utilized for the purchase of an annuity providing for monthly pension of the subscribers. The remaining amount is paid as a lump-sum.
How is the annuity paid?
The annuity is paid through the direct bank transfer to the specified subscribers’ accounts only by the life insurance company.
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