Immediate Annuity vs Deferred Annuity: What Is The Right Fit For Your Retirement

Retirement planning requires you to make your most crucial decision of creating a consistent income source after the end of your working years. The annuity plan can act as a perfect instrument to meet your retirement goals as it is one of the few products that offer a guaranteed lifetime income stream among all available investment options. 

Under an annuity plan, individuals pay premiums to the insurer either as a lump sum or in recurring instalments to receive a steady income starting immediately or from a predetermined future date.

The annuity payment system works for both retirees and those still working. Annuity plans are also well-suited for all types of workers, including salaried employees, business owners, and freelancers.

“Annuities not only help create lifelong financial security by protecting investments from market fluctuations, but they also provide the dual financial benefit of receiving regular income post-retirement, besides providing death benefit protection to your nominee,” says Sabyasachi Sarkar, MD & CEO, Go Digit Life Insurance.

Purpose Of Buying An Annuity Plan

Once you retire, your salary, which is a source of regular income stream, will stop. However, your expenses will largely remain unchanged. Hence, you need to plan your investments wisely during this period. Your savings become a guaranteed income stream through the annuity solution.

“An annuity exists to generate steady financial stability during retirement, which provides ongoing income until your death. It functions as a pension replacement system, offering ongoing payments in your post-retirement years, making it an ideal solution for those without sufficient pension benefits or for those looking to boost their retirement savings,” says Sarkar.

The investment provides peace of mind as it minimizes the chance of outliving your savings. Your retirement savings can provide financial stability, which allows you to maintain your current lifestyle while enjoying retirement with independence and dignity.

There Are Two Primary Types of Annuities:

Immediate Annuity

Under this type of plan, the insurance company receives a single payment from the policyholder to establish an immediate annuity. The insurance company starts providing guaranteed payments to policyholders right after they purchase the policy. The policyholder can start receiving payments from the policy inspection based on the chosen annuity frequency, which includes monthly, quarterly, annual, and semi-annual modes.

Deferred Annuity

Deferred annuities are designed to help individuals save over an extended period, with payments beginning at a future date. The plan offers three essential benefits: guaranteed post-retirement income, a death benefit for beneficiaries, and access to liquidity through surrender value until the vesting date. These features make deferred annuities an effective tool for building substantial post-retirement financial security, especially for those looking to make regular deposits and growing their savings steadily over time.

Expected Returns

According to SahajMoney, a financial planning firm, depending on the type of annuity plan, returns range between 5 per cent and 9 per cent. Deferred annuities with life-only options can provide returns of up to 8 per cent per annum, while immediate annuities typically provide steadier returns in the range of 5.7 per cent to 7.6 per cent.

Picking The Right Annuity For Your Future

Your decision to choose between an Immediate Annuity and a Deferred Annuity should depend on your current financial situation and planned retirement date. 

“Retired people along with people who will retire soon should choose Immediate Annuities as these products provide immediate financial support. The payment process for Immediate Annuities needs a single payment at the start to begin receiving benefits right away. The guaranteed returns and death benefits of this product come with higher costs and restricted investment growth and customization options,” informs Sarkar.

If you are younger, you should plan ahead for the long term and select Deferred Annuities as that will give time for your investments to grow. The payment system of Deferred Annuities accepts both single payments and periodic installments, which enables compounding during the deferment period to generate higher annuity.

Deferred annuities provide better affordability, more flexibility and additional features that include joint life coverage and critical illness coverage. The plans require additional time as income distribution occurs with a time lag.

Should You Buy?

“Retirees looking to get fixed pension and unwilling to invest in market-linked product can consider annuity plans as they provide guaranteed lifetime income, protecting them from the risk of outliving their savings -- although they shouldn’t entirely depend on fixed annuity as with time it might not keep up with inflation,” says Abhishek Kumar, Founder at SahajMoney.

Conclusion

Your financial position at present, together with your risk acceptance level and planned financial objectives, can help you decide which annuity plan best suits your needs. If you are unsure, consulting a financial advisor can help in selecting an annuity plan that matches your retirement goals. The selection of an annuity depends on when you buy it and how well you plan and understand your options. With the right plan, your retirement can be a journey of financial stability and lasting peace of mind.