Term of the week : Annuity

An annuity plan covers the financial risk of an individual living ‘too long’. It is an insurance contract aimed at providing a steady income post-retirement. There are two types of annuity contracts - immediate annuity and deferred annuity.

If it is a single premium policy with pension starting immediately after payment of the premium, it is known as immediate annuity policy. This is in case of senior citizens who have already retired and have a lump-sum on hand to invest. But, if you are still young, say in your 40s, and you have another 15-20 years to build your corpus before retirement, you will have to look at deferred annuity where you pay the premium over a period of time and the annuity (pension) starts from the end of that term. Insurance companies give the option of receiving the annuity in monthly, quarterly or annual basis for a fixed period or till the end of life.

Though the amount invested in an annuity policy is not taxed, the annuity payment (pension) one receives is taxable at the slab rate.

Given the guaranteed pension these plans offer, the rate of return (the annuity rate) is generally low. On immediate annuity plans, the return now is about 6 per cent. Pradhan Mantri Vaya Vandana Yojana, also, an annuity plan, the return is 8 per cent return.

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