Explore The Different Types Of Annuities

There was a time when salaried workers with pension benefits would look forward to their retirement. In most cases, their pension was linked to their most recently received salary, so they didn't have to worry about their pensions falling short of their needs. With the specified pension they got, they were financially secure.

However, in recent decades, the cost of living has escalated, upsetting even the best-laid retirement plans of individuals. Defined benefit pensions have given way to defined contribution pensions, signalling a shift in policy. Because the amount of pension each person receives is now dependent on how much they save for retirement, the change has virtually abolished the whole pension safety net.TO find out more on annuity, read on.

What Is An Annuity?

An annuity is a type of financial investment that pays a fixed and predictable dividend. These are long-term agreements with an insurance company in which an individual invests money in exchange for a monthly payment. Individuals can understand the mechanisms of life insurance plans if they reverse the way they are constructed. Annuities function in the same way as life insurance plans in that the respective individual pays monthly payments and receives regular payouts. Similarly, annuities protect an individual from the risk of living a long life, just as life insurance protects against the danger of dying young.

Annuities may also be thought of as a versatile retirement plan that can be utilised to generate more income or supplement an existing one. The two basic types of annuities are deferred and immediate annuities. An immediate annuity provides a stream of income right now, whereas a delayed annuity provides a source of income at a later date.

Types Of Annuities

Following are some types of annuities that are available to an individual -

• Lump-Sum Annuity

Lump-Sum annuities are one of the most common types of annuities. As the name indicates, this annuity plan allows for a lump-sum payoff. The option of a lump-sum annuity is typically optional, and it is only available for a short period. In most cases, however, subscribers will not be able to withdraw the whole annuity payment in one go. For example, the NPS requires that 40 percent of the money saved be used to purchase an annuity.

• Immediate Annuity

An individual pays a predetermined lump-sum premium and receives payment immediately once the lump-sum amount is paid off under an instant annuity plan.

• Deferred Annuity

In contrast to an instant annuity, a delayed annuity requires the premium to be paid over a certain period of time, known as the accumulation phase of the programme. Following the completion of the accumulation period, the funds are utilised to purchase an annuity, which is paid to the individual on a regular basis after retirement.

• Fixed Annuity

The annuity payout under a fixed annuity remains constant throughout the contract's life. This type of annuity operates similarly to a fixed monthly pension and is ideal for those who want a consistent source of income. With this annuity plan, the payouts are fixed, but the chances of financial increase are slim.

• Variable Annuities

Variable annuities offer a larger potential return, but they also come with a higher risk. For  example, an individual can pick from a menu of mutual funds that go into their personal "sub-account." The success of the investments in each individual's sub-account determines their retirement benefits.

• Indexed Annuities

Indexed annuities are in the centre when it comes to risk and potential reward. Although the performance of a market index is linked to a proportion of an individual's return, a person is guaranteed a minimum payout.

Endnotes

An annuity might be a great option for individuals who want a consistent and stable income in retirement. For many individuals, a regular source of income is sufficient, and they can address growing expenses and other cost-of-living problems with their other assets and investments.

Also read: National Pension Scheme - Features, Benefits, Details, etc.    

Pension Plan Options You Need to Know in 2021

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.