You may have multiple financial goals set for yourself, once you are finally free from the duties of your profession. However, securing a regular income for your sunset years is more important than any other goals. When you think of retirement, you wish to lead a life that is at least as comfortable as it is today, without the need for financial dependence on others.
This is not just wishful thinking, but rightful thinking because, after decades of hard work, you cannot spend your sunset years worrying about money. Once this need has been satisfied you can aim to fulfil the other aspirations. Annuity plans are designed to help you fulfil this financial need, hopefully, without the worry of outliving your retirement corpus.
What Are Annuity Plans?
Annuity refers to a regular payment, for example, receiving Rs. 1 lakh every year. Although the literal meaning of annuity is annual payments, in the case of pension annuity means any mode of regular payments. Thus, an annuity helps you get a steady flow of income or cash inflows post-retirement.
The best annuity plans in India can offer you lifelong income. These are long-term safe investment plans which preserve your invested capital for a long time and generate regular income for you. Many lifetime annuity plans also help you leave a legacy for the next generation with the option of return of purchase price upon your demise.
When To Start Annuity?
Ideally, you should plan your annuity such that the regular amount replaces a large part of your pre-retirement income. You can ensure this in the following two ways:
- Invest a large sum of money in a deferred annuity plan
- Build your corpus using a high growth investment and then use immediate annuity plans
Most annuity plans allow you to start investing at the age of 40. Thus, if you want to invest directly into an annuity plan this is the minimum age you should start. However, annuity plans are one of the safest investments of all time. Thus, the rate of return is low.
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.
Seven Types of Annuity Plans
1. Deferred Annuity
You can invest a large sum of money now, but you can postpone your regular income for a few years. The money continues to grow in the idle period and the annuity will start on the increased amount. You can also invest regularly for a few years to build your corpus.
2. Immediate Annuity
This annuity starts immediately after the investment. For example, you invest Rs 10 lakhs now to receive a monthly income of Rs. 10,000. You will receive the first payment one month after the investment.
3. Life annuity
You will get annuity pay-outs in the opted frequency (monthly/quarterly/yearly) until your demise. The annuity pay-outs stop thereafter.
4. 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.
5. 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.
6. Joint life annuity
Annuities are paid until either you or your spouse is alive.
7. Joint life annuity with return of purchase price
Best for protecting pension for your spouse and leaving a legacy for your children. 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 Much Money Will You Need?
The first step to annuity planning is forecasting the income flow needed after the requirement. This is the figure you want to receive as annuities and therefore your lumpsum corpus should be planned accordingly. For deferred annuities, it is best to start several years in advance so that you can start allocating a portion of your income into relevant life insurance plans.
When projecting your post-retirement expenses, you will note that the types of expenses would look very different from what they are today. Expenses related to children may not exist then because s/he would be earning and independent. Costs related to commuting to work, leisure trips, etc may also come down if you prefer spending more time home with family and friends.
A quick back-of-the-envelope calculation will show you that only about 20-30% of your monthly income goes towards “living costs”. The remaining money is either spent on EMIs, lifestyle, children, or future savings.
So, if you are currently earning Rs. 1 lakh a month, you are spending approximately Rs. 20,000 - 30,000 on your necessary living needs. This amount, adjusted for inflation, will translate into approximately Rs. 90,000 in 30 years. So, if you are 30 years old now, this is the amount you will need, each month, to start your retirement at 60.
To achieve such a post-retirement income starting at the age of 60, you will need a corpus of about Rs 2.5 crores.
Guaranteed Income for Life
The Guaranteed Income4Life, from Canara HSBC Oriental Bank of Commerce Life Insurance Company, is an option you should consider if you are looking for an income stream to match a future expense, such as post-retirement.
You can “accumulate” by investing during the premium paying term and defer the pay-outs. The policy offers some additional features under the premium protection option. Premium protection will financially secure the goal in case of your untimely demise or disability within the policy tenure. Some key highlights of this plan:
A. Future premiums are waived off in case of untimely demise or permanent disability
B. In case of untimely demise, the nominee will receive the sum assured immediately. The nominee will also receive the fund value at the time of maturity. They can opt to receive the fund value in regular/periodical streams or as a lump sum.
Another smart policy, from Canara HSBC Oriental Bank of Commerce Life Insurance, to avail a regular guaranteed income stream in line with your expense projection is the Pension4life Plan, wherein you will be paid the pre-defined amount of annuity each month post-retirement. This policy gives you a wide range of choices to select from, besides giving you a guaranteed lifetime income that is transferred directly to your bank account. The joint annuity options ensure that you remain stress-free about your partner’s expenses in case of your demise. There is another silver lining that returns the entire corpus to the family in case of your demise.
Carefully planning your retirement is essential so that your lifestyle continues as is even after your full-time employment comes to an end. Your money, saved throughout your career, then becomes the financial nest that would give you a predictable stream of cash flows. These savings policies issued by life insurance companies such as Canara HSBC Oriental Bank of Commerce Life Insurance are reliable because of the brand trust, legacy of operations, and excellent track record.