What is an immediate annuity plan?
Immediate annuity plans provide the policyholders with monthly, quarterly, half-yearly or annually annuity immediately after investments have been made by the policyholder. Payments continue for a specified period or for the lifetime of the annuitant, depending on the plan option chosen.
With the support of an immediate annuity plan, policyholders are able to secure a steady stream of income for their partners even if they happen to not be present in the future.
What is a deferred annuity plan?
Deferred annuity plans allow individuals to create a retirement corpus. Policyholders can pay a single, limited or regular premium over the policy tenure and create a corpus for their retirement.
Deferred annuity plans allow policyholders to squirrel away funds for their future. These funds grow during the accumulation phase, and on vesting (maturity), policyholders can choose how to utilize the corpus. They can commute a part of the accumulated corpus and receive annuity from the remaining amount. Deferred annuity plans are suitable for individuals who are in their active working years and can save up for retirement. NPS subscribers can commute up to 60% of the corpus tax-free (as per PFRDA guidelines). For insurance annuities, commutation and tax treatment may vary depending on the product and IRDAI regulations.
Immediate vs Deferred Annuity: Key Differences Explained
Now that you know the two types of plans available in India, let’s understand the difference between an immediate annuity and a deferred annuity –
Type of plan
Deferred annuity plans are meant to create a retirement corpus and help you save up during the policy tenure to create the said corpus.
Immediate annuity plans are meant to create a source of regular income through annuity payouts.
Premium payment
Premiums for deferred annuity plans can be paid in a lump sum (single premium), for a limited tenure (limited premium) or over the policy tenure (regular premium).
Premiums for immediate annuity plans are payable in a lump sum when you buy the policy.
Annuity payouts
Annuity payouts start after vesting of the deferred annuity plan which can be years later.
Annuity payouts start immediately from the next chosen frequency under immediate annuity plans.
Commutation benefit
One of the benefits of annuity plans is the facility of commutation. Deferred annuity plans allow you to commute a part of the accumulated corpus and receive it as a lump sum at vesting. Such a deferment option is not available under immediate annuity plans which begin payouts immediately upon purchase. NPS subscribers (regulated by PFRDA) can commute up to 60% of the corpus tax-free. For insurance-based annuity plans, commutation limits and tax treatment may vary by product and are subject to IRDAI guidelines and prevailing tax laws.
Tax implication
Premiums paid for deferred annuity plans can be claimed as a deduction under Section 80CCC. A part of the commuted value of the corpus received on vesting is also tax-free under Section 10(10A).
Immediate annuity plans offer no tax benefits. The annuity received is taxable in your hands.
The difference between immediate and deferred annuity plans can be seen in the table too.
| Parameters | Deferred annuity plans | Immediate annuity plans |
|---|
Purpose
| To create a retirement corpus over the chosen policy tenure
| To start receiving annuity income immediately after buying the plan
|
Premium payment
| Single, limited, or regular premium payments are allowed
| Only a single premium is payable called the purchase price
|
Annuity
| Paid after vesting, which may be years later
| Paid immediately from the next chosen frequency
|
Commutation
| Available (subject to regulatory limits (usually up to 1/3rd for insurance pension plans, up to 60% for NPS).)
| Not available
|
Tax implications
| Premiums paid are allowed as a deduction under Section 80CCC. A part of the commuted value of the corpus is also tax-exempt under Section 10(10A)
| No tax benefits are available
|
How to select between immediate and deferred annuity?
When considering which kind of annuity plan might be suitable to a given individual, they must consider their age. For those of whom are close to retirement or have already retired, immediate annuity plans could be more appropriate. This is because they provide policyholders with annuity immediately once enrolled.
Conversely, those who are still starting out, young, and in the prime of their life can afford to invest their money in a deferred annuity plan. This is because investments are required to be made for a particular time frame only after which policyholders are eligible to avail of their annuity.
When comparing immediate annuity vs deferred annuity, it is important to bear in mind the following facts –
- Senior citizens are taxed on annuity income as per their applicable income tax slab. If total income is below the basic exemption limit, no tax is payable.
- Policyholders may be allowed to commute up to a specified percentage of their corpus (typically up to 1/3rd for insurance pension plans) tax-free, subject to prevailing tax laws, but income generated from annuity plans is taxable in accordance with the policyholder’s income tax slab.
- Retirement calculators can help in determining how much retirement corpus you would need.
Important Factors to Evaluate Before Buying an Annuity
Before buying an annuity plan, here are some factors that are to be evaluated –
- If you are buying a deferred annuity plan, choose a policy tenure that aligns with your retirement planning goals. Assess the number of years after which you intend to retire and choose a policy term that matches this horizon.
- When buying immediate annuity plans, compare the annuity rates across insurers and choose an insurer offering the highest rates.
- Deferred annuity plans are available in both traditional endowment and ULIP forms. Choose a plan that aligns with your risk appetite and financial strategy.
Key takeaways
- Deferred and immediate annuity plans help you plan for retirement.
- Deferred annuity plans are designed to help you save up for a retirement corpus over the policy tenure.
- Immediate annuity plans are meant to create a regular income flow in the form of annuity payouts immediately after you buy the plan.
- Choose between a deferred and an immediate annuity plan depending on your needs and age.
Conclusion
Prior to investing in a plan, it is important for prospective buyers to consider their present financial needs, long-standing financial goals, present savings or investment portfolio, the ramifications of inflation, and possible substitute plans presently available to them.
Retirement benefits could be maximized provided one has planned well in advance.
FAQs
What benefits does a deferred annuity offer for long-term retirement planning?
Deferred annuity plans come with a long-term policy tenure allowing you to save in a disciplined manner to create a retirement corpus. You can choose a traditional endowment or ULIP plan to create a corpus that matches your risk appetite.
Which annuity is better for senior citizens – immediate or deferred?
If you are a senior citizen and retiring shortly, it is better to choose an immediate annuity plan to start receiving a fixed income. A deferred annuity plan is suitable for individuals who have time to retire and who are looking to create a retirement corpus.
Can I convert a deferred annuity into an immediate annuity later?
Yes, upon vesting, deferred annuity plans allow you to utilize the accumulated corpus to purchase an immediate annuity. This marks the transition from the accumulation phase to the payout phase, where you begin receiving regular income. While it’s not a direct conversion of the same contract, it is a standard and expected progression in retirement planning through annuity products.
What happens if I surrender an annuity policy?
If you surrender a deferred annuity policy, you might receive a surrender value depending on the type of policy selected, the term after which you surrender and the number of premiums paid.
Are annuity payouts taxable in India?
Annuity payouts are treated as taxable income and taxed in your hands at your slab rates.
What is the minimum investment required in an annuity plan?
The minimum investment depends on the type of policy that you choose. Different plans have different criteria for minimum investment. So, check the policy brochure to understand the minimum premium required to buy the annuity policy.
