Retirement is a mix of different investment stages and options. An annuity is one of the final stages of a retirement plan. An annuity is a term used for referring to an investment option that allows you to draw a regular income. Though you don’t need to retire to start the income, you should start after retirement only.
The best annuity plans will help you mitigate the risk of outliving your savings. The primary aim of the annuity plan is to turn your retirement corpus into safe and long-term income.
What are the Benefits of Buying an Annuity Plan?
Annuities generate a guaranteed income stream, often over the lifetime of the holder and his/her spouse. There are no other financial products that do this. Debentures can pay back interest until maturity. Stocks can grow wealth in the long run. But neither of these instruments can give guaranteed income over a lifetime.
Life insurance annuity plans like Pension4Life from Canara HSBC Oriental Bank of Commerce Life Insurance are best for creating a stream of reliable post-retirement income. Other plans like Invest 4G offer a great way to build your corpus as well.
Annuities provide the following key benefits:
1. Safe & Reliable Income
To manage post-retirement expenses, you may save some amount each month from your current income. But saving alone may not help you reach a corpus that you have to, to sustain your standard of living even after retirement.
The saving should also work hard so that it grows multi-fold by the time you retire. Annuities are among the safest available financial instruments that create wealth as stocks do, but with much lesser volatility and risk. You can choose the frequency of pay outs and opt for monthly, quarterly, half-yearly, or yearly streams.
Annuities are technically the same as insurance policies and not made for short-term investments or gains. Annuities offer guaranteed income streams for the rest of your and your spouse’s life. You can additionally use annuity plans to return the purchased corpus to your nominee after your spouse’s demise.
Moreover, there is an assurance for the family to opt for a return of purchase price in case of your demise.
2. Wealth Boosters
Insurance investments are designed to gain from the dynamics of movements in the financial markets to give you superior returns in the targeted period. You can also avail of higher annuity instalments for the increased purchase value. If you purchase an annuity online, your annuity rate will increase by 2%. For NPS subscribers that have purchased through the sales team or online channel, Canara HSBC Oriental Bank of Commerce Life Insurance offers an increase in annuity rates by 1%.
3. Loyalty Additions
Canara HSBC Oriental Bank of Commerce Life Insurance offers an increase of 1% for annuities purchased by existing policyholders of the company.
4. Automated Portfolio Strategies
If you use plans like Invest 4G to build your retirement corpus and receive pension income from it, you can benefit from the multiple investment options. You can invest your money in both debt and equity instruments based on automated or pre-determined allocation strategies.
When you are young, the plan helps you invest aggressively in equity-oriented funds and receive better growth for your retirement funds. You can switch the funds to the safe debt and liquid funds from equity and continue the plan up to the age of 80.
The partial withdrawals after retirement will be tax-free.
5. Tax-Savings U/S 80C & 10(10D)
The amount paid towards the premium is deductible under Section 80C up to Rs. 1.5 lakhs. Whereas plans like Invest 4G also allow tax-exemption on the amount withdrawn under Section 10(10D). The tax saving works on annuity plans provided by life insurers under the following conditions:
- The annual investment in the plan is less than 10% of the life cover
- Maximum annual investment in ULIP plans should not exceed Rs 2.5 lakhs (for ULIPs bought after 1st Feb 2021)
6. High Liquidity
Your money is not “stuck” as you may assume. Annuities offer more liquidity than most people think. The policy allows withdrawal under the “Special Surrender Value” status. Meaning, as long as specified conditions are met, you can withdraw your money.
Stages of Retirement Plan for Annuity
The pre-retirement saving phase is called the “accumulation phase” whereas the post-retirement pay out phase is termed as “vesting phase”. Annuities are the investment option you can use in the vesting phase. You can still invest in two types of annuities:
- Immediate annuity- Deferred annuity
In case you are already at retirement age and have a lump sum amount, you can buy an “immediate annuity”. Thus, the pay-out begins immediately in form of cash flows paid at specified intervals (monthly/quarterly/annually).
However, if you want to start the income a few years later, the deferred annuity is a better option.
Joint Life Annuity
In both types of annuities, the annuity can continue for either a fixed period or for your lifetime. However, when your spouse is dependent on your pension, you do not want it to stop after your demise. Thus, you can opt for a joint life annuity.
A joint life annuity implies that your spouse will continue receiving income streams even after your demise. Through the process of annuitization, your contributions are converted into periodic pay outs that can last your lifetime as well as that of your spouse. The annuitized payments continue even if the total pay outs are more than the saved corpus with interest factored in.
In case of Immediate Life Annuity with Return of Purchase Price on Critical Illness (CI) or Accidental Total & Permanent Disability (ATPD) or demise before age 85, whichever occurs earlier, annuity pay outs will cease, and 100% of the purchase price will be payable.
Canara HSBC Oriental Bank of Commerce Life Insurance permits surrender of annuities if they are immediate/deferred single/joint-life annuity with return of purchase price option. However, tax on surrendered value is subject to applicable taxation that is in force.
You can also avail loans on the policy provided you have opted for ‘Deferred Life Annuity with Return of Purchase Price’ and the policy has attained the surrender value stage.