Annuity Meaning & Definition

Name: What is Annuity
Brand: Axis Max Life Insurance
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For every individual, retirement planning is a crucial part of life, for which he/she seeks ways to ensure financial independence later in life. An annuity is one such way with which people can plan t

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Alok Mishra

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What is Annuity?

An annuity is a contract between an individual and life insurer aiming at generating a regular income for life after retirement. For annuity, lump sum payment is made by the investor, which is then invested by the life insurance company to pay back the returns generated from it.

At its core, an annuity is a contract with which you can plan to generate a steady income at a future time, such as during the retired times. In India, people purchase annuities to prepare for their retired lives. You should also know that most people consider it a form of insurance, not an investment avenue.

Those who find it difficult to understand what is annuity can think of it as a plan under which they can receive regular payment for life in return for a lumpsum investment.

Let us dig deeper into its various facets to describe what is annuity and how you can benefit from investing in it.

How Does Annuity Work?

Next to knowing what is annuity, you must understand how it works before investing in it. Given below is a step-wise functioning of an annuity plan:

- You begin by choosing an annuity plan and making a lumpsum investment in it based on your needs and goals

- As per the annuity plan specifics, you will receive payments on a series of dates. You can choose to receive these payments monthly, quarterly, or yearly

- Several factors, including the annuity tenure, determines the income payout that you will receive

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- You can opt for a guaranteed payout (fixed annuity) or the one backed by the performance of an annuity plan’s underlying investments (variable annuity)

What are the Types of Annuities?

There are several types of annuity for individuals planning for a steady income source post retirement. These include the following:

1. Deferred Annuity

It is one of the unique types of annuity, which includes a specific interval between the premium payments and annuity payouts. The tenure for which a subscriber pays the premium is referred to as the accumulation phase of these types of annuity.

After this phase ends, he/she utilises the accrued amount to purchase annuities to receive future payouts.

2. Immediate Annuity

This type of annuity requires an individual to pay a lump sum amount as a premium to become a subscriber. Once this payment is made, the payouts under these annuity plans start immediately as per the pre-defined payout criteria.

3. Fixed Annuity

As the name suggests, a fixed annuity is one of the most popular types of annuity chosen by people in India. Under this annuity plan, the payouts will remain constant over the entire tenure. It is considered a conservative option, with the money being invested into fixed income instruments mostly.

Although there is a little growth potential with the principal investment, a fixed annuity is preferred as it guarantees income to the subscribers post retirement.

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4. Variable Annuity

In these types of annuity plans, there occur variations in the payouts between one instance to the next. The variations are majorly linked to the performance of the benchmark or the index to which the underlying investment is mapped.

Being index-linked, variable annuity plans cannot guarantee specific payouts to the subscribers and is thus, a riskier proposition for many pensioners.

Taxation on Annuity

Along with knowing what is annuity, you should be aware of their tax implications. Annuity meaning in terms of taxation is relatively easy to understand. Since an annuity plan provides the benefits of payouts to the subscribers, they are treated as a monthly salary and are taxed by the income tax authorities as per prevailing income tax slabs.

It is also noteworthy that the payouts from the annuity are considered an income of subscribers and is added under the head, ‘Income from all other sources’ for taxation.

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As annuity payouts are added to the taxable income and taxed as per the income tax slabs applicable, following are income tax slab for FY 2020-21 (Old regime).

Annual income slab	Tax rate for people in the age bracket of 60 to 80 years	Tax rate for people of age greater than 80 years
Up to Rs. 3,00,000	Nil	Nil
Between Rs. 3,00,000 to 5,00,000	5% of the amount above Rs. 3 Lakhs	Nil
Between Rs. 5,00,000 to 10,00,000	Rs. 10,000 along with 20% of taxable income above Rs. 5,00,000	20% of total taxable income above Rs. 10,00,000
Above Rs. 10,00,000	Rs. 1,10,000 along with 30% of taxable income above Rs. 10,00,000	Rs. 1,10,000 along with 30% of total income above Rs. 10,00,000

Note:

- An additional surcharge is applicable above the tax rates defined in the table above in the cases where annual taxable income goes beyond Rs. 50 Lakh. Surcharge rates varies as per the income

- An additional health and education cess of 4% is also applicable to income tax and surcharge payable

How to Use Annuity Calculator?

Retirement funds and other relevant bodies purchase annuities as per market conditions. It is where an annuity calculator comes into use. It helps investors draw estimates of investments needed during the accumulation phase to create a desired corpus at the end of the investment tenure.

Here are a few inputs required while using an annuity calculator:

1. Income Details

As an investor, your current annual income is a key parameter needed to use the annuity calculator. It is because your current income has a direct bearing on your ability to save money. Additionally, you also need to enter the expected income growth rate over the coming years.

2. Demographic Information

Your current age and expected retirement age are used as a data point in the annuity calculator to determine the accumulation phase of annuity. In general, the earlier you begin investing in an annuity plan, the longer you can stay invested in it, which will increase the payouts during retirement.

3. Regular Expenses

Your current regular expenses do determine the amount you can save or invest over time. If the expenses are low, it means there is a high potential for savings and vice versa. Also, these expenses are most likely to go up, keeping the inflation rates in mind.

4. Current Savings

Separate savings for retirement kept early on can benefit you more because of the power of compounding. Hence, you should consider the current savings and how they are held (in FDs, stocks, or mutual funds) while planning to invest in annuities.

5. Inflation Trends

The inflation rate can have a prolonged effect on future savings. For instance, if the rate of inflation goes up, then you need to save more to build a specific retirement corpus. Alongside, the regular expenses also tend to rise over time, making the inflation-adjusted returns from investment seem less valuable.

How to Buy Annuities?

Being considered a form of insurance plan in India, annuities can be purchased from major life insurance companies. These include both private and public sector insurance companies that are currently operating in the country. Along with life insurers, you can also buy an annuity plan from AMCs entrusted to manage the National Pension Scheme (NPS).

At Axis Max Life Insurance, we also offer Axis Max Life Guaranteed Lifetime Income Plan (UIN - 104N076V10), a Non-Linked Non-Participating Individual General Annuity Savings Plan. You can calculate its premium online

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Frequently Asked Questions (FAQs)

Q. Is annuity different from a mutual fund?

Q. What are the advantages of investing in annuities?

Q. Is there any disadvantage of investing in an annuity plan?

Q. How is annuity income taxed?

Q. Should I invest in annuities for retirement planning?

ARN:- Jan21/Bg/13G

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