3 min
19-August-2024
When planning for retirement, one of the most important decisions you will face is how to secure a steady income stream for your later years. Annuities are a popular choice among retirees because they provide a reliable income for life or a set period. However, within the world of annuities, there are different types to choose from, each with its own advantages and considerations. Two of the most common types of annuities are immediate annuities and deferred annuities. Understanding the differences between these two can help you make an informed decision that aligns with your retirement goals.
What is an Annuity?
Before diving into the differences between immediate and deferred annuities, it’s important to understand what an annuity is. An annuity is a financial product offered by insurance companies that provides a series of payments over time in exchange for an initial investment. Annuities are designed to protect against the risk of outliving your savings by converting a lump sum into a steady income stream.
If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure.
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Also read: FD interest rates
Also read: Post Office FD interest rate
If you are looking to diversify your investments portfolio, Fixed Deposit (FD) can be a good choice. FDs provide a fixed interest rate throughout the investment period. Interest rate on FDs does not change with market fluctuations. NBFC’s like Bajaj Finance offers one of the highest rate of up to 8.65% p.a. on their Fixed Deposits.
Consider an immediate annuity if:
You are near or in retirement and need a guaranteed income stream.
You want to ensure you don’t outlive your savings.
You prefer a simple, straightforward income solution.
Consider a deferred annuity if:
You are still several years away from retirement and want to build a future income stream.
You are looking for tax-deferred growth opportunities.
You want the flexibility to choose when to start receiving income.
What is an Annuity?
Before diving into the differences between immediate and deferred annuities, it’s important to understand what an annuity is. An annuity is a financial product offered by insurance companies that provides a series of payments over time in exchange for an initial investment. Annuities are designed to protect against the risk of outliving your savings by converting a lump sum into a steady income stream.
If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure.
Banner and text Component:
For web:-
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| Text | Mandatory | Pro tip | |
| Text | Mandatory | Enjoy higher interest rate with Bajaj Finance Digital FD. Unlock returns of up to 8.65% p.a. by investing for %$$FDmaxintresttenureFD$$% via our website and app. | |
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Also read: FD interest rates
What is immediate annuity?
In an immediate annuity plan, you are required to pay a lump-sum amount as a premium in one go. After you pay the premium to your insurer, you start receiving monthly annuity income immediately. In this plan, you can also choose to receive the payout on a monthly or yearly basis. In addition, with immediate annuity insurance, you may also be secured with a death benefit clause. Under this, in case of the untimely demise of the policyholder, as per the insurer’s terms and conditions, the nominee can avail certain benefits.What is deferred annuity?
On the other hand, a deferred annuity plan requires you to pay premiums on a monthly or yearly basis. These premiums gradually stack up until the maturity date of the policy. This is a fixed tenure and after it is over, you, as the policyholder, can use the accumulated corpus to purchase the annuity. However, an important thing to note here is that after maturation, you can only withdraw 1/3rd of the total collected funds. The remaining amount is utilised to purchase the annuity, providing you with regular income after retirement. Furthermore, a death benefit may be offered as part of a deferred annuity plan.Also read: Post Office FD interest rate
Differences between immediate annuity and deferred annuity
| Particular | Immediate annuity | Deferred annuity |
| Funding | Lump-sum payment made at once | Payments made in instalment premiums that accumulate over time |
| Payout | Quick payouts as you start receiving annuity income immediately after completing the contract and making the premium payment | Payouts here begin only once all the instalment premiums are collected and the maturity period in the contract is over |
| Withdrawal | Typically, there are no partial withdrawals allowed | Here, depending on your plan, you can make partial withdrawals. However, do remember that it may lead to lower returns or attract penalties. |
| Returns | Lower returns compared to deferred annuity | Higher returns compared to immediate annuity |
| Affordability | Can be more expensive than deferred annuity plans as there is only a one-time payment | More cost-effective as the premium instalments are to be paid over time |
If you are looking to diversify your investments portfolio, Fixed Deposit (FD) can be a good choice. FDs provide a fixed interest rate throughout the investment period. Interest rate on FDs does not change with market fluctuations. NBFC’s like Bajaj Finance offers one of the highest rate of up to 8.65% p.a. on their Fixed Deposits.
Which annuity is right for you?
Choosing between an immediate and deferred annuity depends on your individual financial situation, goals, and retirement timeline.Consider an immediate annuity if:
You are near or in retirement and need a guaranteed income stream.
You want to ensure you don’t outlive your savings.
You prefer a simple, straightforward income solution.
Consider a deferred annuity if:
You are still several years away from retirement and want to build a future income stream.
You are looking for tax-deferred growth opportunities.
You want the flexibility to choose when to start receiving income.
