All retirement planning is based on the objective of creating a stable income flow in the post-retirement years. Annuities are considered as one of the 7 tax-saving investments in India that offer steady income plus lucrative tax benefits. Different types of annuity plans are available to meet the varied retirement needs. Annuity certain is a type of annuity that offers a fixed and guaranteed income to the annuitant for a specific number of years. This payment is regardless of how many years the annuitant survives. In other words, annuity certain plans have an expiration date, after which no payments are made to the annuitant, even if the individual survives. The predetermined period is known as the ‘certain period’, and it typically varies from 10 to 20 years.
If you want to diversify your investment portfolio, you can consider a stable investment option like Fixed Deposit
Types of annuity certain
Annuity certain can be subdivided into the following categories:
- Fixed annuity certain: Fixed annuities certain offer a guaranteed rate of interest on your investment, and payments remain consistent throughout the specified period. This predictable, guaranteed income ensures stability for your golden years but can often fail to keep pace with inflationary pressures.
- Variable annuity certain: Variable annuity certain allows you to invest in a diversified portfolio of market-linked assets. The annuity pension derived from these contracts depends on the performance of these investments. While such types of period certain annuities bring you possibilities of higher market-linked returns, they also carry a higher level of risk.
- Life annuity with period certain: While annuity certain differs from pure life annuity, this hybrid sub-type combines both benefits. Under a life annuity with period certain, you receive annuity pension for life if you live beyond this predetermined period. However, if you pass away before the end of this ‘certain’ period, the annuity pension is paid to your designated primary beneficiary until the end of that period.
Why choose annuity certain
- Guaranteed income
Annuity certain offers a stable, fixed, and guaranteed income flow during the chosen period. Since you know exactly how long you will receive payments with a defined period plan, you can budget and plan your finances better. - Estate planning
If you pass away before the end of the certain period, your beneficiaries receive the rest of the payments. In other words, your spouse and kids can benefit from the consistent income stream for a certain duration, even in your absence. This helps secure the financial future of your loved ones even after your demise. - Liquidity
While annuities are long-term investment vehicles, some plans offer partial withdrawal or lump-sum payout options to help you meet your liquidity needs. Instead of making premature withdrawals from other savings avenues like FD — which can lower fixed deposit interest rates and hamper your earnings, you can leverage these options.
Rather than withdrawing an FD prematurely, Bajaj Finance offer loans against it. Up to 60% of non-cumulative or 75% of cumulative FD values can be borrowed, allowing investors to maintain their deposits while accessing needed funds.
Considerations for annuity certain in India
When choosing an annuity certain plan in India, you need to consider the following factors to ensure that the plan aligns with your financial requirements and fits into your retirement planning:
- Reliability of the insurer
Assess the reliability of the insurance provider to choose one with a strong history of payments. Ideally, you should buy an annuity pension plan from a company with a good history of fulfilling its payment obligations. This ensures your investment is safe and the promised income stream is delivered without delays or interruptions. - Inflation risk
The purchasing power of annuities can decline over time due to rising inflation levels. In other words, the real value of the fixed income offered falls, reducing your purchasing power. For inflation-adjusted payments, you can consider investing in variable or indexed annuities that come with certain market-linked risks. If you wish to avoid these risks on the annuity front, you can complement your annuity pension with other inflation-beating investments. 3 year investment options like liquid funds, corporate FDs, and ELSS offer great opportunities for higher returns to help balance long-term inflation risks. - Fees and charges
Any type of annuity plan usually comes with various fees and charges, including expenses fees, administrative charges, mortality fees, and surrender charges. These fees can significantly impact your returns on the investment and, thus, must be carefully assessed before the annuity is purchased. For instance, if you anticipate the possibility of early withdrawals from the fund, you need to examine surrender charges carefully before purchasing the annuity. - Tax implications
You also need to consider the tax treatment of annuity certain in India. While your premium payments towards the annuity plan are tax-exempt, the annuity income received is classified under ‘Income from Other Sources’ and taxed according to your applicable tax slab. Taxation of payments can affect the net income benefit from the annuity, especially for those qualifying for a higher tax bracket. That is why it is prudent to start retirement planning early and park funds in other tax-saving avenues like PPF, where the payout is tax-exempt.
