Immediate Annuity Plan: Meaning, Types, Benefits & Drawbacks
Retirement is a life-phase that might bring a halt to your monthly definitive earning. However, your daily expenses, like your medical bills and education expenses for your children, continue to exist. This is why you need to invest in retirement plans. There are multiple pension and annuity plans that offer you a steady source of income in your golden years.
Annuity plans are essentially an agreement between you and an insurance company, wherein you receive periodic payments from the amount previously paid by you.
While there are a variety of annuity options available in the market, an immediate annuity plan might be an ideal choice if your retirement is near.
What Is an Immediate Annuity Plan?
An immediate annuity plan refers to a type of annuity in which you are required to pay a one-time, lump sum premium amount. With this type of plan, you can start receiving guaranteed and instant payouts from the next chosen frequency since you deposit the premium. There is no accumulation phase in immediate annuity as the plan gets activated immediately after the vesting phase.
What Are the Features of Immediate Annuity Plans?
Following are some salient features of an immediate annuity plan:
- If you opt for an immediate annuity plan, you need to pay a single premium amount, known as purchase price.
- An individual can choose their annuity payment frequency, which can be monthly, quarterly, semi-annually or annually.
- You can opt for a single life or a joint life annuity. In case of a joint life annuity, your spouse also gets covered. In this case, the policyholder is known as the primary annuitant, and the spouse is known as the secondary annuitant.
- In case you do not opt for a joint life annuity, the annuity payment will stop after the policyholder’s demise.
- Most annuity plans allow you to start investing at the age of 40
What Are the Types of Immediate Annuity Plans?
The investment made into an annuity plan grows in either of the two ways. You either get payouts based on the interest rates, or the premium amount is invested in the market to generate returns. Hence, the two types of immediate annuity plans are:
Fixed Immediate Annuity
In exchange for a lump sum premium amount, the annuity provider offers to pay you a consistent income for the rest of your life or a specific period. This type of annuity helps you earn a stable and consistent income during your retirement.
Variable Immediate Annuity
Variable Immediate Annuity puts your money in investment subaccounts, which resemble mutual funds for annuities. Hence your returns depend on the market risks and performance of the sub account that is tied to assets like bonds, stocks, or money market instruments. If the underlying asset performs well, your payout increases. However, if the underlying assets do not perform well, then your payment decreases, similar to regular investment accounts.
How Does Immediate Annuity Plan Work?
Step 1: Choose the immediate annuity plan of your choice.
Step 2: Make the payment for the plan.
Step 3: Choose how you wish to get back the benefits or the frequency of your payments.
Step 4: After buying the policy, making the premium payment, and selecting the frequency, you will receive the annuity payouts immediately. For example, if you buy the policy on November 1 and you opt for getting the payments every month, your annuity payment will start from December 1.
Step 5: You will receive the payment for the rest of your life, and if you opt for a joint-life annuity, the payment will continue till the joint owner passes away. The availability of the death benefits depends on the annuity payment option that you select.
What Are the Benefits of Investing in Immediate Annuity Plans?
- Simplicity: Once you make the payment to the insurance company, you will start receiving the payouts as per the details of the insurance plan.
- Tax benefits: Although the income you receive is taxed as regular income, the premium amount is tax-exempt to the extent of Rs. 1.5 lacs. Therefore, it is a partially tax-free income source.
- Immediate income: This type of investment is suitable for people nearing retirement as their salary stops after a certain age. With this plan, they can avail a regular post-retirement income.
- Customisation available: In this plan, you can nominate your spouse so that the payment comes in even after your demise. You can even receive your payout for your entire lifetime or for a specific period of time.
What Are the Risks of Investing in Immediate Annuity Plans?
Although an immediate annuity offers a number of benefits, there are also a number of drawbacks that you cannot overlook. These are as follows:
- Lower interest: One downside of an immediate annuity is that they typically offer lower interest rates as compared to many investment options. Therefore, the payout value might not keep up with inflation.
- Lower liquidity: When you purchase an immediate annuity plan, you give up control of a lump sum amount of money. As immediate annuity plans do not have much liquidity, you cannot access your funds in case of financial emergencies.
- Death benefits: Some immediate annuities do not offer death benefits. This means your loved ones will not be able to receive any benefits after your demise.
- No refund: An immediate annuity is an irrevocable contract. You can neither cancel the agreement nor get a refund once you purchase a plan. Also, the payment is fixed, which means that you cannot increase or decrease the payout amount.
Tax Implications of Immediate Annuity Plans
When compared to other types of insurance plans, annuity plans have different tax implications. They are:
- Tax on the premium payment: As per section 80CCC of the IT act, you can avail a maximum tax deduction of Rs. 1.5 lakh on the premium amount. The deduction under section 80C is also clubbed within this limit.
- Tax implication on annuity: The annuity payments you receive does not qualify for a tax deduction. Instead, these payments are added to your total income and are taxed according to the applicable tax slab rates.
Who Should Invest in Immediate Annuity Plans?
- Suppose you are going to enter retirement soon and require a secure way to generate regular income after retirement. As payment begins immediately, this plan helps turn savings into income for the rest of your life.
- If you are someone who has a significant amount of savings and wish to find a secure way to generate income from that after your retirement, you can opt for an immediate annuity plan.
Immediate annuity plans are an ideal way to substitute your income after you retire. You can also ensure annuity incomes for your spouse in your absence creating financial security for them. So, if you are nearing retirement invest in an immediate annuity plan and get assured income even without having to work.
FAQs about immediate annuity plan
What documents do you require to buy an immediate annuity policy?
In order to buy an immediate annuity plan, you will need your photograph, age proof, address proof, identity proof and other documents your insurance company asks for.
Do immediate annuity plans offer any discounts?
No, you do not get any discounts under immediate annuity plans. However, many immediate annuity plans offer higher annuity rates if the purchase price is high.
On what factors do annuity rates depend?
The first factor is the vesting age of the annuitant; the older the annuitant, the higher the rates. Secondly, if you opt for a joint life annuity, the rates might be lower than single life annuities. Third, the lower the annuity payment frequency, the higher the rate. Finally, the higher the purchase price, the higher the annuity rate.
What happens if the secondary annuitant dies before the primary annuitant?
In case the secondary annuitant dies before the primary annuitant, the annuity payment will stop after the demise of the first or primary annuitant.