Annuities can be categorized in following three ways:
- Starting Time of the Annuity
- Type of Pension Amounts offered
- Type of Pension Scheme
Annuities based on Starting Time
- Deferred Annuity – Your investment is made into a fund (of your choice) which keeps growing for a chosen period of time. You can choose the time when to start the pension from. e.g. Invest Rs. 1 crore into a debt fund for the next five years. It may give you a fund of above Rs. 1.40 crores after 5 years. This fund is later used to provide you pension. The pension amount will be higher because the fund size is now bigger, as well as because your age is now more than 5 years ago.
- Immediate Annuity – Your investment immediately starts giving you a pension without waiting for any period.
Annuities based on Type of Pension Amounts offered
- Guaranteed (or Fixed) Annuities: This means that the amount of pension that you will receive is fixed for the entire chosen period of the annuity plan, or till death. There is no change in this amount. You need to keep in mind that inflation will keep reducing the real value of a guaranteed annuity over time. At the same time, however, this kind of annuity insulates you against reducing interest rates over time.
- Variable Annuities: In this type of annuity option, you can choose to keep your investment in a variety of asset classes ranging from most conservative (such as money market, guaranteed fixed accounts, and government bond funds) to more aggressive (such as growth, small cap, mid cap, large cap, capital appreciation, aggressive growth, and emerging markets investments). Balanced funds with combination of these asset classes are also available. There is generally a Minimum Guaranteed Annuity in such an option.
This kind of annuity plan works like a high-risk, high return plan although it does allow you to switch from one asset class to the other without any cost. Make sure you know how to manage your fund either yourself or with help from a financial advisor, before you choose a variable annuity plan.
Annuities based on Type of Pension Scheme
- Life Annuity – Guaranteed pension to the annuitant till the end of his/her life.
- Life Annuity with Return of Corpus (or Purchase Price) – Guaranteed pension to the annuitant till the end of his/her life, finally the Corpus (initial investment made) is returned to a nominee.
- Annuity Guaranteed for 5, 10, 15 or 20 years – Guaranteed pension to the annuitant for a fixed period of 5, 10, 15, 20 years. It stops after that. In case the annuitant dies during the period, the equivalent of pension is paid to the nominee for the remaining period.
- Annuity Guaranteed for 5, 10, 15 or 20 years, and for life thereafter – Same as above option the difference being that if the annuitant survives the term, he/she continues to get the same pension till the end of his/her life.
- Life Annuity with Joint Life, Last Survivor – Annuity is paid to two individuals at the same time till their death.
- Life Annuity with Contingent Survivor – Annuity is paid to the principal annuitant till his/her death. If the spouse is alive at that time, the annuity is paid to the spouse till her/his death.
- Combinations – Some companies also offer combinations of the above options.
Case on Different Types of Annuity Plans
- Prabhat Arora, 45-year-old person is worried about his retirement. He wants to get retire at the age of 60 and expects to live till the age of 80. He aspires to get a fixed monthly annuity of Rs. 60,000 for 20 years after retirement. So, he has been advised to buy an annuity product which will achieve his port retirement income objective by accumulating a corpus of around 80,000,00 till his retirement.
- In another scenario, if Prabhat wants to retire at the age of 55, he’ll need a corpus of approximately Rs. 95,00,000 at retirement.
- Sudheer on the other hand also wants to retire at 60, but, instead of fixed amount, he wants his annuity to increase by 5% every year. The estimated corpus should be around 1 crore, if his life expectancy is same as Prabhat.
- Prabhat and Sudheet, along with their wives also have the option of joint life annuity, which will continue to give benefits to his wife after his demise, if she survives longer than him.