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Annuity Calculator: How to Calculate Annuity Value?

dateKnowledge Centre Team dateAugust 13, 2021 views214 Views
Single Annuity Plan | Joint Life Annuity | Best Retirement Plan

Rome was not built in a day! You can draw a parallel from this age-old pithy when you plan for your retirement. You must have a plan to save and grow that saving over the years so that you get a steady flow of money post-retirement and thus lead a comfortable retired life.

The concept of saving for retirement has another common ground with Rome. Annuity, as we know it today, dates back to the ancient Roman era when citizens kept lump-sum amounts in safe custody in return for a reliable stream of payments for a defined period.

This arrangement was termed, “annua”, which has now evolved to become “annuity”. However, this concept, quod est, is now referred to as “immediate annuity”.

The Safety of Guarantee

Modern consumers love the safety nets, called “guarantees” offered by sellers. Many companies even get customers to enter into extended support schemes called “Annual Maintenance Contracts (AMCs)” that give consumers peace of mind and comfort to the pocket.

Automobiles are covered by “motor insurance” whereas health is covered by “health insurance” to pay for expenses incurred to repair the vehicle or cover hospitalization. An annuity is also a type of guarantee to give you steady cash flow, post-retirement, for a defined period or sometimes until even the end of your life and that of your spouse as well.

The Legal Eagle

In legal parlance, an annuity is a contract between an insurance company and the person. The company is mandated to make periodic payments after a pre-defined date. In case the payments start immediately, the contract is called “Immediate Annuity'' and if the person invests money for a defined term after which the pay outs begin then the contract is called “Deferred Annuity”.

In the lesser-known type called the growing or increasing annuity, the cash flows grow at specific intervals of time. The saving period when you set aside a part of your income to build your retirement kitty is called the “Accumulation Phase” whereas the pay-out period is called the “Vesting Phase”.

Type of Annuities

In India, annuities are very popular financial instruments when planning for retirement. Considering the “assurance” that it provides and the risk (of outliving one’s income) that it mitigates, annuities are largely considered insurance products. Some other types of annuities widely offered by reputed insurers such as Canara HSBC Oriental Bank of Commerce Life Insurance are:

1. Life annuity: Annuities are paid in the opted frequency (monthly/quarterly/yearly) until your demise.

2. Life annuity with return of purchase price: You will get annuity pay outs in the opted frequency (monthly/quarterly/yearly) until your demise. After your demise, the corpus used to purchase the annuity is paid to your nominee.

3. Annuity Payable for a Guaranteed Period: The annuity is paid for the guaranteed period, even after your demise. Annuity stops either on your demise or on completion of the guaranteed period, whichever is later.

4. Joint life annuity: Annuities are paid until either you or your spouse is alive.

5. Joint life annuity with return of purchase price: These annuities are paid until you or your spouse is alive. After the demise of both, the nominee will get the amount initially invested.

How to Calculate the Present Value of Annuities?

If you are offered Rs. 1 Crore today vs Rs. 10 Lakhs paid each year for 10 years, you will opt for Rs.1 Crore today without batting an eyelid. You are aware that the purchasing power of the same amount would go down in the future due to the impact of inflation.

If you are 40 years old and expect your post-retirement expenses to be approximately Rs. 90,000 per month, you can use the present value formula/calculator to calculate the amount that you must start saving now.

The present value of a future pay out represents the amount of money today, which, if invested at a certain rate of interest, would grow to the amount that you will need then. This process of calculating the present value of future cash flows is also called “discounting”.

C = Cash flow per period (pay out amount)
n = Number of payments
i = Rate of Interest

The amount to be invested each month during the “accumulation phase” is inversely proportional to the rate of interest. Most annuity plans allow you to start investing at the age of 40. Therefore, if you want to invest in annuity plans, you must put your money into some robust high-growth insurance plans until 40 before moving your funds into annuity instruments.

As annuity plans are one of the safest investments of all time, the focus is on capital preservation rather than aggressive growth. So, if you are looking for growth, investing directly in annuity plans may not be the best investment decision.

Yet, you can invest your windfall gains into deferred annuity plans and reinvest the annuity income if you do not need it. This way you can keep your capital safe and enjoy better growth as well.

How Much Annuity to Expect?

If you start investing Rs. 30,000 per month from the age of 40, and your investment gains an average interest of 7% per annum, you will accumulate approximately Rs. 1.6 Crores by the time you turn 60. At 6% per annum, this corpus can fetch you approximately Rs. 80,000 per month as a steady income stream post-retirement.

In a nutshell, you are investing Rs. 3.6 lakhs per year and getting a return of Rs. 9.6 lakhs per year.

Annuities are the best forms of savings if you are looking at safety, stability, and inflation-beating returns, in other words, post-retirement income stream.

For the ultimate peace of mind, you must invest your hard-earned money in insurance companies that have legacy and credibility in the market. After all, you are planning for several decades ahead-it is best to be in safe hands.

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Frequently Asked Questions (FAQs) for Retirement and Pension Plans

The premium is one of the most important factors to consider before buying a policy. Many people buy a life insurance policy with a high sum assured but are unable to process the premiums for the entire premium payment tenure. You can get a better idea of the premium outgo with the Premium calculator available in the ‘Tools and Calculator’ section of

The Invest 4G plan offers three benefit options to choose from. If you have opted for the Life Option or Whole Life Option, the insurer will pay the nominee(s) death benefit if the policyholder meets with an unfortunate incident. However, in the Life Option with Premium Funding, the policy continues even after the death of the policyholder. The company pays the remaining premiums until the policy matures.

Life is unpredictable and so it is important to prepare for all eventualities. If you regularly save a substantial amount of your income for retirement, the corpus may expand to a comfortable level before retirement. In case you become disabled and are unable to contribute to the retirement plans, most plans will continue to multiply your savings. The amount already accumulated will continue to grow and besides the existing plans you can also choose to invest in pension schemes specifically designed for people with disability.

Investment in ULIPs like Invest 4G plan qualifies for tax deductions under section 80C of the income tax law. The maturity benefits of ULIPs are also tax-exempt under section 10 (10D) of the Income Tax Act, 1961. However, if the premium paid during the policy term is more than 10% of the sum assured, the maturity proceeds will be taxable.

The concept of early retirement is catching up fast in India, but there are no specified ages for early retirement. While in some western countries the age between 35 and 45 is considered favourable for early retirement, in India the ideal age is 45-50 years. With the right planning and investments, it is not very difficult to retire early.

At the age of 35-40, people generally have several responsibilities such as children’s education and various EMIs. It is difficult to spare a substantial amount of income for retirement. Depending upon the needs of the household and the lifestyle, one should aim to save around 40-50% of his/her income. Around 10% of the income should exclusively be allocated for retirement planning. Here are some tips to choose the best retirement plan.

  • Focus on your needs: It is easier to formulate a strategy when the goal is clear. Make an estimate of the amount required to sustain your life. Take inflation into account and zero in on the targeted corpus.
  • Research thoroughly: Conduct thorough research before investing in any financial product. Read the term and conditions properly and try to understand how an investment product fits your needs.
  • Consider different products: The market is awash with all kinds of investment products. Do not follow conventional advice as the need of every person is different. Take into consideration all the suitable products, conduct an objective analysis and then invest.

Owning a house is a cherished dream for many. There are several ways to save for a new house, but in urgent cases, people may be tempted to withdraw from their retirement fund. There are various financial products for retirement planning, and all have different withdrawal rules. In the case of the National Pension Scheme, partial withdrawals for special purposes like buying a house are allowed only thrice during the policy tenure. However, to avail the withdrawal facility, you should be an NPS investor for at least 10 years and you are permitted to withdraw only 25% of your contribution. If you have a PPF account, you can withdraw 50% of the accumulated amount, but only after staying invested for at least 6 years. The Invest 4G plan also allows partial withdrawals after five years of investment.

The quantum of monthly savings depends on the specific needs of the buyer. Financial advisors, however, suggest people save around 15% of the monthly income for retirement.

Retirement plans such as NPS have a very low entry threshold. It is also open to all and anyone can open an NPS account and start saving. A small business can also invest in Invest 4G plan from Canara HSBC Oriental Bank of Commerce for as low as Rs 5000 every month.

The choice between paying off a student loan or start a retirement account is not a difficult one. Starting early for retirement planning has its own advantages but extending the student loan will increase the interest burden. You will have to find a balance between the two. Try to pay off the student loan as soon as possible, but do not hold back on investing in a retirement account.

Most people nominate their spouse to receive retirement benefits in their absence. But a spouse is not automatically entitled to be the beneficiary of a retirement account owned by the other spouse.

Gold is a safe investment asset and investors often flock to the yellow metal to stabilise their portfolios. Holding a small quantity of gold can be considered as the intrinsic value of gold remains intact. You can also choose to have an exposure to gold through ULIPs. ULIP funds invest in a variety of asset classes and some fund options also have a small exposure to gold. You can choose fund options with gold to have a small and indirect investment in gold.

While there are no explicit rules barring the use of retirement account to finance real estate, it may not be advisable to do so. For instance, you are allowed to avail loan from the PPF account from the third financial year. The loan can be used to finance real estate, but it would defeat the purpose of having a dedicated retirement account.

While there are no explicit rules barring the use of retirement account to finance real estate, it may not be advisable to do so. For instance, you are allowed to avail loan from the PPF account from the third financial year. The loan can be used to finance real estate, but it would defeat the purpose of having a dedicated retirement account.

The government has allowed all central government pensioners to open a joint account with their spouses.

Vesting date or age signifies when your pension plan’s accumulation phase is over and the distribution phase can begin. For example, in a deferred annuity plan, you may have a vesting date which is 10 to 30 years away depending on your age at entry. You will continue to invest or stay invested till the vesting date. After the vesting date or age, you can start receiving the pension or withdraw the money from the plan.

The steps may differ from plan to plan. However, you can buy the online retirement plans following the steps below:

  • Retirement Calculator: Use a retirement calculator to estimate your corpus need and expected monthly investment amount to achieve it
  • Choose Plan: Select the online retirement plan you want to start investing in
  • Contact Information: Fill in the personal details including the contact information. Make sure to put the correct e-mail ID which you can access since all future communication about the policy will take place via e-mail.
  • Define Your Investment: Select the goal, investment term, investment frequency and amount you want to invest (based on the calculator estimate)
  • Select Fund Allocation: Online retirement plans give you the option to invest in multiple assets including equity funds. You can select the ratio in which your premium will be allocated to these funds as per your risk appetite. Then select one of the portfolio rebalancing strategies.
  • Select Withdrawal Plan: You can withdraw money based on set milestone or systematically from the plan after the lock-in period. Select the options for withdrawal as per your plan.
  • Review Plan & Investment Details & Complete the Application Form

You can pay the premium amount before or after completing the application form to start investing.

The best time to plan your retirement is when you are planning your career. However, this may not be the time when you really start investing money for your retirement. You must start investing in your retirement plan as soon as you start earning.

Retirement is the only financial goal you cannot repair with other means of funding like a loan. Thus, developing the habit of investing with every income you have is the best way to have a comfortable retired life.

Insurance allows your family, especially your dependent spouse to continue living without financial worries if anything happens to you. Also, insurance may help you save enough for retirement in case of permanent disabilities. Additionally, life insurance retirement plans allow you to build a good retirement corpus with bonus additions.

Yes, you can change the nominee of the policy anytime you need. If you are using an Electronic Insurance Account (EIA) to manage your policies, you can change the nominees anytime from this account. Otherwise, you can contact the customer care to update the nominations on your policy.

You can opt for auto-debit of the premiums from your savings account. You can also pay the premiums online using your debit card, credit card or a payment wallet.

You can get Rs. 1 Core pension plan using the online retirement calculator. The calculator will assess your eligibility and provide you with the probable monthly or annual investment to achieve the goal. If the amount seems feasible you can complete the purchase online or set an appointment for a qualified advisor to help you in the process.

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