By Vivek Jain,
While people want their retirement years to offer them freedom, not many plan for it. One can achieve freedom during one’s golden years by ensuring a regular flow of guaranteed income which lasts for life. Deferred annuity plans serve both these purposes.
Annuity plans
Before we get to deferred annuity, let us first understand what annuity plans are. While most working Indians understand the importance of retirement planning with 75% of them aspiring for a comfortable retirement, a recent study has revealed that only one third actively invest towards that goal.
A retired person would need a guaranteed income every month to lead the lifestyle of their choice. Since predictability of the income and the safety of the corpus is crucial for retired people, these plans are shielded from the unpredictability of market volatility.
There are annuity plans that start with a lump sum payment, and there are those where one can invest monthly during their working years. There are also plans that combine the two approaches. Those whose retirement is still many years away can invest monthly to ensure that they get a higher income post retirement, and those who are near retirement or are already retired can invest their savings in a lump sum manner in an annuity plan and draw regular income from it.
Finally, there are two kinds of plans based on when the income stream starts. One is immediate annuity wherein the retiree can draw monthly payouts right after making the initial investment. The other is deferred annuity wherein there is a gap and the payout period starts after some time. Deferring the payout can be hugely beneficial.
How deferred annuity can secure your future
When you defer the payout, the income you receive is higher due to the benefit of compounding. So the total amount invested either in lump sum or collected over time grows for some years.
A longer deferment period lets one draw a larger sum when the payout starts.
Let’s assume a 60-year-old person invests `40 lakh in an annuity plan with a return rate of 8%. If the annuity payments start immediately, he would receive around `23,520 per month for the rest of his life. Alternatively, if he invests the same amount at the age of 50 and defers the payout by 10 years (starting at age 60), he would receive `42,400 per month. This is the power of deferred annuity plans where, with the same initial investment, the payout is nearly doubled.
Similarly, consider a 40-year-old individual who invests `10 lakh every year for 20 years in a regular pay deferred annuity plan. Starting from the 21st year (when they turn 60), they would receive `16.8 lakh every year for the rest of their life.
So not only do deferred annuity plans guarantee regular income for life of the policyholder, these also offer a higher sum while being predictable and insulated from market uncertainties.
The writer is head, Investments, Policybazaar.com