Summary of this article
Annuities convert retirement savings into regular income.
Immediate and deferred plans differ in payout timing.
Fixed, variable and joint options shape income security.
Retirement planning has become more relevant in India as the number of older adults has grown at a rapid pace. Around 173 million people in India are aged 60 years and above, making it the second largest aged population in the world, with its number projected to increase in the next decade.
Based on 2025 reports by the United Nations Development Programme (UNDP) and World Economics, India’s life expectancy at birth stood at 72-72.5 years. Longer life expectancy means that most retirees would require a guaranteed income for 15-20 years or longer, following their retirement from the workforce.
What are Annuity Plans
Annuities are financial contracts provided by insurance companies that turn a lump sum or periodic payments into a steady income stream. The goal is to supply a regular income stream for the retirees who may not have a steady cashflow after retirement. Since public pension schemes may not cover many employees, annuity plans are one of the instruments available to them that ensures they have a steady source of income after retirement.
Immediate Annuity Plans
Immediate annuities start making regular payments shortly after a lump sum is paid to an insurer. For many retirees, such contracts begin payouts within a month or up to a year of purchase, and are designed to cover for their lifetime, or for a certain period of years, such as 10 or 15 years.
An immediate plan may be fixed, with a predetermined amount of payment, or variable, in which payment is dependent on returns from pools of investments chosen by the annuitant. Some plans also have inflation-linked options, in which payments increase over time to help maintain the purchasing power of the retirees in sync with increase in living costs. Payment frequency options usually involve monthly, quarterly, semi-annual or annual intervals.
Immediate annuities are mostly applicable to people who retire with a large corpus and require income shortly after retirement. These annuities convert the accumulated corpus into a predictable income stream without requiring active management by the retiree.
Deferred Annuity Plans
Deferred annuity plans include an accumulation phase during which the invested amount grows before the payout phase. This allows the retirement corpus to grow before income starts. For instance, if a person retires at 60 but wishes to defer income until 65, the invested amount gets five more years to compound.
Deferred annuities are most suitable for people who are still in the later stages of their career or early stages of retirement and wish to ensure higher future income. During the accumulation phase, the annuity plan may provide fixed or variable returns, depending on the type of the plan chosen. After the start of the payout phase, the retiree receives periodic income payments, similar to immediate annuities, but with a delay.
Lifetime and Joint Life Annuities
Lifetime annuities provide income for as long as the annuitant lives. This is particularly useful for people who are worried about outliving their retirement corpus, especially in a world where average life expectancy is increasing. Some plans also provide a “return of purchase price” option, whereby any unused corpus is paid to a beneficiary after the annuitant’s death.
Joint life annuities provide regular income to a spouse or partner after the death of the primary annuitant, although the payment amount may decrease after the first death. These plans help ensure financial stability for families in which two retirees rely on a joint source of income.
Fixed Vs. Variable and Indexed Options
Fixed annuity plans guarantee a set payout amount throughout the contract, offering certainty to retirees planning monthly budgets.
Variable annuities base their income payouts on the performance of the investment portfolios chosen. Even though variable annuity plans provide higher income payouts during favourable market conditions, they also include the risk of lower payments if the specified portfolio underperforms.
Indexed annuities tie payouts to a market index performance with a limited amount of downside protection combined with a portion of market gains participation. Such a plan may be attractive to retirees seeking an exposure to more market growth without all variable risk.
Some annuity contracts offer increasing income payments over time, often at a predetermined rate or in line with inflation indices. Across annuity types, retirees often have flexibility in how they receive payments. The options are either monthly, quarterly, half-yearly or annually. Additional features may include guaranteed periods, return-of-purchase-price benefits, and joint coverage for spouses.
These plans can be used to keep the value of income consistent in the face of rising living costs, which is very crucial on account of unforeseen expenses, such as unexpected medical costs during retirement.
