Annuity plans explained: Which type can give you the retirement income you need?

New business data points to the fact that An annuity is essentially a way of converting a lump sum into a regular income, usually for life. You pay a purchase price to a life insurer and, depending on the product, receive payouts monthly, quarterly, half-yearly or annually. The attraction is predictability: unlike a systematic withdrawal from market-linked investments, a life annuity can continue as long as the annuitant survives.

The first broad category is an immediate annuity. Here, you pay a lump sum and the annuity payments begin after the applicable commencement period, generally soon after purchase. This can suit someone who has already retired and wants to convert part of a retirement corpus into regular income. IRDAI’s standard Saral Pension is an example of an individual immediate annuity product.

A deferred annuity works differently. You invest or pay premiums during an accumulation period, with the annuity beginning after the chosen deferment period. It can as a result be relevant to someone who is still working and wants to build a future pension stream rather than needing income immediately. Current life-insurance products include both single-premium deferred annuities and immediate annuities.

Within these categories, one important choice is between a single-life annuity and a joint-life annuity. A single-life annuity pays income while the primary annuitant is alive, according to the selected terms. A joint-life annuity can continue paying income to a spouse or secondary annuitant after the primary annuitant dies. The percentage continuing to the spouse can vary by product and option.

Then comes the question of what happens to the original purchase amount after death. A life annuity without return of purchase price generally offers elevated income because there is no return-of-capital benefit built into the option. By contrast, a return-of-purchase-price annuity provides for the specified purchase amount to be returned to the nominee or surviving annuitant after death, depending on the terms. The trade-off is that the starting annuity may be softer.

Some annuities offer a guaranteed-period or annuity-certain feature, where payments are guaranteed for a specified number of years and continue thereafter if the annuitant is alive. For example, products in the market offer five-, 10-, 15- or 20-year certain periods. This can be useful for families worried around an early death shortly after retirement, but the precise death-benefit structure needs to be checked.

There are additionally increasing annuities, where the payout rises at a predetermined rate, and newer products can offer variable payouts linked to a publicly available benchmark under regulatory conditions. The latter can introduce some investment risk for the annuitant, so it should not be confused with a completely set pension.

The right choice ultimately depends on what you are trying to protect. Someone seeking the highest possible immediate income may prefer a straightforward life annuity. A couple may prioritise joint-life protection, while someone concerned around leaving money to heirs may consider return-of-purchase-price options. An increasing annuity can address inflation concerns, although the starting income may be softer.

Annuities as a result should not be compared only by asking, “Which one pays the most?” Look at the payout, death benefits, spouse continuation, inflation protection, surrender or liquidity provisions, taxation and the insurer’s terms. For many retirees, using only part of the retirement corpus for an annuity while keeping the rest invested and liquid can provide a better balance between guaranteed income and financial flexibility.