How Annuity Helps to Plan Better Retirement?

Created on 30 Mar 2020

Wraps up in 5 Min

Read by 3.3k people

Updated on 10 Sep 2022

As many say, retirement is the start of a new adventure. It is that time of your life where you are relieved of all your responsibilities. But things are never going to be the same while you retire as it is today. Inflation is going to touch new peaks along with your ever-growing needs. So, without a steady flow of income, your new adventure will soon turn to be nothing more than a horror story. In no time you might be forced to return to the workforce once again. I am pretty sure that most of us don’t want to get back to work, rather than enjoying the perks of old age. So what should you do? 

This is where a sound retirement planning comes into play. Planning your retirement well in advance helps you to set things on the right track. Despite the various investment options available in the market, annuities have emerged to be an ideal investment product. It is an investment product that is offered by insurance companies. They offer steady or fixed income flow and are highly beneficial for retirees. These are low-risk low return investment options. Especially, when you want to throw a lump sum into an investment avenue that would generate a stable income, an annuity will be a great pick. 

For example, say you are 60 years old who has purchased a life annuity. You have invested 3,00,000 in the annuity. In that case, you might be bagging a return of 8.51% which is fixed for life. However, this is just an assumption. The returns might vary based on the plan you are choosing, the amount you are going to invest, your period of investment, how long you are going to stay invested, age, etc.

 Irrespective of the age anyone can invest in an annuity. Annuity as an investment plan is suitable for anyone who is searching for a low-risk investment avenue. However, people who are young or below the age of 40 have a comparatively longer duration to take risks and realize higher returns. But for a person who is nearing retirement that freedom is restricted. Hence, annuities are increasingly popular among the retiring population than youngsters. But as a youngster, you can buy one if you are looking to build a strong retirement portfolio. 

 The following are the pros and cons of purchasing an annuity product. 

Pros of annuities 

  • They happen to be a huge support in your old age as they constitute a continuous flow of income. 

  • They provide the safety of the principal. Hence, they can assist greatly in boosting your portfolio. 

  • Further, they offer fixed returns. That is, the returns are predictable when compared to other securities that exist in the market. 

Cons of annuities 

  • The insurance company may charge huge fees. 

  • The income paid may not meet the growing inflation needs. 

  • Withdrawl of the invested amount before the specified period may carry along huge surrender charges.  They are also comparatively less liquid. 

Every annuity you purchase might fall under the following four major categories. 

Immediate annuity 

Under this annuity the investor, once a lump sum is invested, gets a fixed income immediately. The investors can choose whether he wants to receive the returns monthly, quarterly or annually. Immediate annuities cease to generate income on the death of the annuity holder and the investor may not receive the entire value on his invested amount. However, a joint and survivor annuity lets the beneficiaries of the annuity holder to receive the returns even after the death of the annuity holder. An immediate annuity which pays only for a limited period, say 5 years or 10 years is also available.

Deferred annuity 

Unlike an immediate annuity, the deferred annuity pays the amount only after a certain period. You will be required to invest at regular intervals or as a lump sum and interest on the accumulated amount is paid at the end of a particular period. These investments are less liquid than the other securities. On the death of the annuity holder, the beneficiaries will be receiving the payment. The income received or the amount withdrawn is subject to tax according to the tax slab. If you intend to withdraw a lump sum on maturity, then only 1/3 rd can be withdrawn without tax. The rest is taxable. A deferred annuity can either be variable or guaranteed. 

Variable annuity

Here the return of income which you may receive is not fixed and might vary from time to time. That is the returns or income which you will be receiving depends on the underlying assets where investment is made. The annuity holder can choose either a conservative, moderate or aggressive portfolio. These annuities are riskier than the other three types. 

Guaranteed annuity 

This is an investment product that promises to pay a fixed amount of income to its investors after an agreed duration. These investments are tax-deferred. In other words, the annuity holder is obliged to pay the tax only while receiving the returns or while withdrawing a lump sum. These annuities mostly invest in government bonds. Hence, it offers the safety of principal. These annuities can also be converted into immediate annuities if the investor intends to. 

Now let's draw a comparison between the four types. (Note that the below comparison is only between the four types of annuities and not in comparison with other securities.



Immediate annuity

Deferred annuity

Variable annuity 

Guaranteed annuity 


This will pay you the highest return. As the payment period is longer the benefit you will acquire will also be more. 

Pays moderate to good returns. 

This will pay you a good return as it gives you good exposure to equities. 

Here the returns are fixed. Hence, you will be receiving a lower return compared to others. 


Once you purchase it there is no going back. The principal will only be returned in terms of the income you receive.   

The principal can be withdrawn before the end of the actual investment period but involves huge surrender charges. 

The principal can be withdrawn but involves surrender charges. 

The same follows here. The principal can be withdrawn but involves surrender charges. 


No fees or charges are to be paid.

Less fee is charged. 

A high fee is to be paid.

No fee is charged.


High risk 

Moderate risk

Highly risk

Less risky


Adding the right ingredients to your retirement plan is an essential factor. No matter how strong your portfolio is, investing in an annuity product is mandatory.  It helps you to stay safe and tackle the worse especially when the winds are against your favor and your other investments are not generating sound returns. In simple terms it can do more good than you expect. Now all you have to do is pick the right plan that suits your investing pattern and matches your desired returns. And you are all good to go.

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Deb P Samaddar

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If people could be named after idioms, Deb would be called "I'm all ears." His brain is a storehouse, ever overflowing with derelict information. So, while most things he talks about are as useless as occasion-less greeting cards, everything he writes has the potential of bagging you multiple diplomas!

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