The most important concern for a retired person is regular income. An annuity product is a financial instrument that gives periodic income for the rest of your life. In India, it is sold by life insurance companies. These are products that help you accumulate a corpus with which you can buy an annuity later, or if you have ready corpus, you can buy an annuity immediately. These are called deferred and immediate annuities, respectively.
Types of annuity
A deferred annuity requires you to first build a corpus, and then use it to buy an annuity. Pension plans offered by life insurance companies, and even the National Pension System (NPS), come in this category because they first help you build a corpus and on retirement, require you to buy an annuity product with a part of that corpus.
NPS, for instance, allows you to invest regularly in funds of your choice. At 60 years of age, you can withdraw only up to 60% of the money. The remaining needs to get annuitised. You can buy an annuity product from five life insurance companies that are empanelled as annuity service providers for NPS. You should know that NPS is a retirement product that needs you to keep investing for the long term, so even when you plan to exit the product before retirement, the product discourages you by mandating you to annuitise 80% of your corpus.
In case of life insurance products, you need to annuitize at least two-third or 66.67% of the corpus on maturity. The remaining one-third can be taken as lump sum. Also, when you buy a pension plan, on maturity, you need to buy an annuity product from the same insurer.
Immediate annuity, on the other hand, doesn’t need you to commit to accumulating a corpus. Just take your money and buy an annuity from any insurer that provides immediate annuity.
Your retirement corpus needs to meet two goals: to provide you regular income and to make sure you stay ahead of inflation. Sit with a financial planner to understand how much exposure you should take in annuities.