How much pension you want to get on a regular interval is a factor of how much you save towards building a retirement corpus. And, therefore, it has become cumbersome for retirees or people who are nearing retirement to decide the best annuity or pension plans.
An annuity is a financial investment for retirement that helps pay you a fixed and regular income. However, before deciding, you must closely study all the options available.
1. Annuity with RoP on death
What is it: RoP (return of premium) is an annuity option that guarantees fixed annuity payouts to the annuitant throughout his/her life. On his/her death, the initial amount paid to purchase the annuity is returned to the annuitant’s nominee.
Who should buy: “For individuals who have dependents and are worried about the needs of their loved ones, an annuity with RoP will be a suitable choice,” said Bharat Kalsi, chief financial officer, Bajaj Allianz Life.
2. Joint life annuity
What is it: This type of annuity option covers an annuitant and his/her spouse. Under this option, an annuity is paid till at least one of the life assured is alive.
Who should buy: Retirement is when one’s earning capacity is low or nil, yet the living expenses continue, more so when you have dependents, including spouse and children. This is where a joint-life annuity option helps,” said Kalsi. The plan ensures that you receive a regular income throughout your life, and on death, your spouse will receive an annuity throughout his/her life. Furthermore, joint-life annuity also comes with a return of purchase price option, which is again a very relevant feature as on the death of both the annuitants, the nominee gets the purchase price.
3. Increasing pay annuity
What is it: In this type of annuity plan, the payout increases at a fixed rate annually where the plan holder gets an additional amount predefined in the plan.
Who should buy it: “People who want to maintain their lifestyle at par with the increasing expenses and market inflation must take this to avoid any financial hassle. It gives the plan holder an assurity that they will be able to manage their regular expenses and fulfil their responsibilities, however it is not directly linked with the inflation rate as it increases at a fixed rate and pre-decided by the insurance company,” says, Naval Goel, founder and CEO, PolicyX.com.
4. Level annuity
What is it: A level annuity pays the same amount for life. This type of annuity is not indexed with inflation. Also, due to this, it can be classed as a “reducing annuity” as over time inflation may erode the actual intrinsic value given on regular payments.
Who should buy: Goel said, “If a person has invested enough amount in his annuity plan that he believes it will be enough to maintain his life and bear all their expense despite any increase in prices or inflation, then he can opt for a level annuity.”
5. Annuity for life
What is it: This is the simplest form of annuity where predetermined and regular payouts are made to the annuitant for his/her lifetime. The payouts can be monthly, quarterly or yearly, depending on the annuitant’s needs. The annuity proceeds stop only on the death of the annuitant.
Who should buy: Annuity plans are designed for providing guaranteed income during one’s retired life to achieve retirement goals. “Annuity for life is the only financial product that can give a predetermined guaranteed income till one is alive (even beyond a hundred years),” Kalsi said.
A life annuity option enables the annuitant to receive a series of fixed future payouts to maintain his/her lifestyle even after retirement, thereby ensuring that the risk of living long is financially secured by the insurer. This annuity option is suitable for every individual irrespective of occupation, age or gender since it tends to give higher returns.
6. Annuity payable for guaranteed time
What is it: In this, the annuity is to be paid for a defined period regardless of whether or not the individual dies during that specific period. And annuity stops either on the annuitant’s death or completion of the period of guarantee.
Who should buy: People who are worried about the risk of losing out on annuity payments due to an early death can go for this option.
7. Annuity with RoP on survival
What is it: This option offers both life and survival benefit to the annuitant. Here, the annuitant has the option to start receiving RoP at a predetermined age.
Who should buy: Annuity on survival ensures the annuitant receives guaranteed payouts throughout life. After specific retirement age, gets back the invested amount of the annuity through the return of purchase price feature with annuity continuing subsequently. This annuity plan is also known as the survival benefit and is popular with individuals who have crossed the retirement age. The survival benefit of this annuity option can help them manage any unexpected medical expenses arising due to old age.
