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Annuity Or Pension: Which is the Right Retirement Plan for You and Your Spouse?

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Annuity Or Pension
September 04, 2024

Table of Content

 

In this policy, the investment risk in investment portfolio is borne by the policyholder.

As you approach retirement, the focus shifts from earning a pay check to ensuring a steady income stream that supports your desired lifestyle. Two popular options that often come up in these discussions are annuity plans and pension plans. Both aim to provide financial security during your retirement. However, they operate in distinct ways. Understanding these differences is crucial to making an informed decision that caters to both your and your spouse's needs.

Annuity Plans

An annuity plan involves making a lump-sum payment or a series of payments to an insurance company. In return, they guarantee a regular, predictable income stream for a specified period or even for the rest of your life. By using an annuity calculator, you can estimate your potential payouts and understand how much income you’ll receive, making it easier to plan for retirement.

A key benefit of annuities is that this guaranteed income remains steady regardless of fluctuations in interest rates or the performance of the stock market, providing a sense of financial security and stability, especially during retirement.

If you have yet to choose an annuity plan, you can consider HDFC Life Smart Pension Plus. It offers a guaranteed1 income stream for your entire lifetime, providing financial security and peace of mind. The plan's flexibility shines with options for both single and joint life coverage, immediate or deferred annuity payouts, and customisable payment frequencies. You can further tailor your plan by choosing from four annuity options:  Life Annuity, Life Annuity with return of a percentage of the total permium paid, Life Annuity with early returns and Increasing Annuity.

You also get the option to defer annuity payouts by choosing the deferment period. This option allows you to potentially accumulate a larger corpus for enhanced retirement income.

The flexibility of annuity plans also allows you to customise the payout options to align with your and your spouse's financial needs.

Pension Plans

Life insurance pension plans, also known as retirement plans, combine the benefits of life insurance coverage with regular income payouts during retirement. To participate in these plans, individuals need to make regular premium payments during the premium term. You may also be able to find plans that allow you to opt for a single lump-sum payment. This mostly depends on the provider.

You could choose a retirement plan such as HDFC Life Click 2 Retire. This plan helps you accumulate a retirement corpus,while providing a death benefit to your beneficiaries in case of your untimely demise, thus ensuring their financial well-being.

Pension plans also offer flexibility in choosing policy terms and premium payment terms, and some unit-linked pension plans have no entry, policy administration, or exit charges.

Head-to-Head Comparison

Feature

Annuity Plan

Pension Plan

Income Stream

Guaranteed for life

Regular income stream, may not be guaranteed for life

Flexibility

Choose payout frequency (monthly, quarterly, half-yearly, or annually) and annuity options (Life Annuity or Life Annuity with Return of Premiums)

Choose policy term (10 to 35 years), premium payment term (single, 8, 10, or 15 years), and vesting age (as early as 45)

Investment Risk

Generally, very low investment risk

Many pension plans are market-linked investments, potential for higher growth but also higher risk.

Premium Payment

Regular premium payments for a limited period (5 to 15 years)

Lump-sum or regular premium payments throughout the policy term

Life Insurance Coverage

No inherent life insurance coverage, however, plans may come with Life Annuity with Return of Premiums option.

Provides a death benefit to beneficiaries (higher of fund value or 105% of total premiums paid)

Eligibility

Minimum entry age of 45, maximum 75

Minimum entry age of 18

Choosing the Right Plan for You and Your Spouse

The ideal retirement plan depends on your individual circumstances and preferences.

Consider the following factors when making your decision.

  • Desired Lifestyle: If you and your spouse envision a comfortable retirement with predictable expenses, the guaranteed income from an annuity plan might be particularly appealing.
  • Risk Tolerance: Annuity plans typically involve very low investment risk compared to pension plans with market-linked investment options.
  • Need for Life Insurance Coverage: If you have dependents who rely on your income, a retirement plan with a life insurance component may be able to provide them with financial protection after your passing.
  • Health and Longevity: If you anticipate a long retirement, a lifetime annuity or a pension plan with a lifetime income option can ensure you won't outlive your savings.
  • Spouse's Needs: Consider your spouse's financial security, especially if they have a shorter work history or lower income. Both annuity plans and pension plans can offer survivor benefits, ensuring your spouse continues to receive income after your passing.
  • Legacy Planning: If leaving a legacy for your loved ones is important, a pension plan's death benefit can be a valuable tool.
  • Premium Payment Flexibility: If you prefer to make a one-time or limited series of payments to secure your retirement income, an annuity plan might be more suitable.

Illustrative Example

Let's take a look at a case study.

Imagine Rahul (60 years) and his spouse (55 years) have saved some money. They are now looking at options to generate a regular income for retirement. Let's see how annuities and pension plans work in this scenario. Rahul and his spouse opt for Joint Life option of HDFC Life Smart Pension Plus. He pays Rs 2.5 lakh p.a. for a Premium Payment Term of 5 years and chooses a deferment period of 10 years and opts for Life Annuity. He chooses to receive his annual annuity for whole life starting but after a deferment period of 10 years. On his survival, Rahul will start receiving guaranteed Annuity of Rs. 1,42,107 p.a. from the end of 11th policy year for whole life. In case of death of Rahul, his spouse will continue to receive the Guaranteed Annuity of Rs. 1,42,107 p.a. till death1. The policy shall terminate on death of the secondary annuitant and all other benefits shall cease.

On the other hand, a pension plan can offer a monthly income that varies based on the returns earned by the plan. A pension plan, such as HDFC Life Click 2 Retire, helps achieve retirement goals by planning well in advance.  So, in this case, Mr. Rahul, when he was aged 40, chose to safeguard himself from the ups and downs of life. He wished to block Rs. 45 lakhs for the next 20 years which should not just help him get a minimum guaranteed amount on maturity, and also gain from the possible market upside that a ULIP can offer. At an assumed return of 8% p.a., Mr. Rahul's fund value on vesting  at 60 years of age would be Rs 45.17 lakh2 and that could fetch him an annual annuity amount^ of Rs 3.55 lakh. If the assumed rate of return is 4%, then fund value would be Rs 21.23 lakh2 and that would get him an annual annuity amount^ of Rs 1.67 lakh.

In essence, annuities offer a predictable income stream, while pension plans provide more flexibility and the added advantage of leaving a legacy for your loved

Conclusion

Choosing between an annuity plan and a retirement plan requires careful consideration of your financial goals, risk appetite, and desire for life insurance coverage.

Both options offer unique advantages, and the best choice depends on your individual circumstances. Remember, it's never too early to start planning for your golden years.

Consulting afinancialadvisor may be able to provide personalised guidance tailored to your specific situation. They can help you navigate the complexities of retirement planning and choose the best path for you and your spouse, ensuring a financially secure and fulfilling retirement.

Related Articles:

ARN: ED/08/24/15044

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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HDFC LIFE IS A TRUSTED LIFE INSURANCE PARTNER

We at HDFC Life are committed to offer innovative products and services that enable individuals live a ‘Life of Pride’. For over two decades we have been providing life insurance plans - protection, pension, savings, investment, annuity and health.

Disclaimer

1. Annuity rate is fixed once the policy has been purchased and shall remain the same for the duration of the policy. Amount of guaranteed income will depend upon Premium(s) paid subject to applicable terms and conditions

2. These assumed rates of returns are not guaranteed and they are not the upper or lower limits of what you might get back, as the value of the policy is dependent on a number of factors including future investment performance.Some benefits are guaranteed and some benefits are variable with returns based on the future performance of your insurer carrying on life insurance business. If your policy offers guaranteed benefits then these will be clearly marked “guaranteed” in the illustration table on this page. If your policy offers variable benefits then the illustrations on this page will show two different rates of assumed future investment returns. These assumed rates of return are not guaranteed and they are not the upper or lower limits of what you might get back, as the value of your policy is dependent on a number of factors including future investment performance.

^This is as per latest annuity rate and not guaranteed, same may change at the time of taking annuity.

The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender/withdraw the monies invested in Linked Insurance Products completely or partially till the end of fifth year.

HDFC Life Smart Pension Plus(UIN:101N173V08). A Non-Linked, Non-Participating Individual/Group Annuity Savings Plan.

HDFC Life Click 2 Retire (UIN: 101L108V04, Form No: P501) is a Unit Linked Pension Product.

Insurance Coverage is available in these products. For more details on risk factors, associated terms and conditions and exclusions please read sales brochure carefully  before concluding a sale.

Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. HDFC Life Insurance Company Limited is onlythe name of the Insurance company, HDFC Life Smart Pension Plus (UIN-101N173V08) and HDFC Life Click 2 Retire (UIN: 101L108V04) is only the name of the unit linked life insurance contract. The name of the company, name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your insurance agent or the intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.

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