Want regular income after retirement? How annuity plans work and what you should know about them

Retirement planning is not just about building a large corpus that looks sufficient on paper. It is also about ensuring that the money lasts throughout your lifetime and provides a regular income after you stop working.

This is where annuity plans can play a role, by converting a lump sum into a stream of payments over a specified period or for life, depending on the plan. Though it sounds like a suitable approach, there is a trade-off.

Once you buy an annuity, your money generally becomes less flexible, as the lump sum is converted into a regular income stream. This makes it important to choose an option that suits your retirement needs and financial circumstances.

How does annuity work?

First, an individual is required to make a lump sum investment in the annuity plan offered by an insurance company, which in turn, will provide them with payments on future dates. This can be paid on a monthly, quarterly, or annually basis.

The annuity or pension payout is determined by several factors, including the tenure of the annuity. You can opt to get the pension payments for the rest of your life or a fixed period.

According to the Pension Fund Regulatory and Development Authority’s (PFRDA) analysis of annuities, the annuity payouts can also be affected by factors including prevailing interest rates, life expectancy and whether you choose single or joint life and return of purchase price.

The annuity or pension income also depends on whether you have opted for a fixed annuity that is a guaranteed pay-out or variable annuity, that is, a pay-out stream determined by the performance of the annuity’s underlying investments.

For example, suppose a 60-year-old man invests ₹10 lakh in an annuity plan after retirement. Depending on the plan’s terms, the insurer may pay a fixed monthly pension for the rest of his life. If the man chooses a joint-life annuity, the payouts will be given to his spouse after his death. Alternatively, a return-of-purchase-price option will return the initial investment to the nominee.

You can choose between these annuity plans

Here are the options available under annuity plans that an individual can choose from when planning for regular income after retirement: