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Immediate Annuity Vs Deferred Annuity

Annuity plans are a significant retirement financial instrument that provides a stable income to retirees during retirement days, either through lump sum contributions or periodic investments. The funds invested accumulate over time and offer you a substantial sum of money for your golden years.

Moreover, annuity plans are flexible and customisable as per your financial needs. This flexibility enables you to tailor your accumulated funds to your preferences and ensures you receive mandatory payouts that help you achieve your financial objectives.

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Immediate Annuity Vs Deferred Annuity

What is Deferred Annuity and Immediate Annuity?

Immediate Annuity Vs Deferred Annuity
October 23, 2024

Table of Content

 

What Is an Annuity?

An annuity is a contract that exists between a policy buyer and an insurance company. Here, the insurance company pays you a regular amount in return for the premiums you have paid after your retirement.

An annuity is not similar to a regular life insurance plan. Life insurance provides death benefits to your family in case of your sudden demise. Whereas, an annuity lets you accumulate money for further use post-retirement. An annuity is also not a savings account. If you have long-term goals, you can opt for an annuity plan. Only an annuity plan can provide you with guaranteed income for a lifetime.

Annuities can be a great addition to your retirement plan, as they ensure assured returns for life. The simplicity of regular payment is another added advantage of annuities. Once you select the right type of annuity plan for you and then consider the terms of your contract, you can continue to receive payment at predetermined intervals, whether monthly, quarterly or annually.

The two different categories of annuities are immediate annuity and deferred annuity. Annuities work in two phases, i.e., the accumulation and distribution phases. The accumulation stage lets you save and grow your retirement funds gradually. In the distribution stage, you begin withdrawing money to generate an income post-retirement.

What Is an Immediate Annuity?

An immediate annuity is a type of annuity plan where a lump sum amount is paid out to an insurance company. In return, the insurance company provides guaranteed payouts to the insured individual almost immediately. From the issuance of the policy, the policyholder can receive the income from as early as one month, considering the annuity frequency (quarterly, monthly, annually, semi-annually) as chosen in the contract.

There is no accumulation stage in an immediate annuity plan. Upon purchasing the plan with a lump sum investment, the vesting stage begins immediately. This makes an immediate annuity the ideal choice for investing in retirement at a late stage.

What Is a Deferred Annuity?

A deferred annuity, unlike an immediate annuity, doesn't pay you immediately. This plan is designed specifically for long-term savings. The main advantage of deferred annuity is this plan lets you invest regularly, letting you accumulate a substantial sum of money. Furthermore, you can make withdrawals during times of need and gain tax benefits1 on both your investments and withdrawals.

The charges you pay to the insurance company usually take the form of withdrawal charges, penalty taxes, income taxes, and surrender charges. Annual fees are, however, an important part of deferred annuities. The assets in the annuity plan are charged as rider and sub-account management fees. Thus, it's essential to go through all relevant details before making any decision about investing in a deferred annuity plan.

Difference Between Immediate Annuity and Deferred Annuity

Immediate and deferred annuity plans vary in significant ways. Let’s explore the difference between immediate annuity and deferred annuity in detail:

Immediate Annuity

Deferred Annuity

An immediate annuity plan provides a payout immediately after your investment. Additionally, the immediate annuity offers death benefits to the nominee or beneficiary after your sudden demise. This, however, varies on the terms and conditions and from one insurer to another.

In a deferred annuity plan, you need to invest a lump sum for a fixed period and then receive the annuity after a specific time. This plan also provides death benefits to the nominee in case of any unfortunate incident during the policy tenure.

This plan is ideal for those looking for income payouts on an immediate basis after retirement.

A deferred annuity plan is ideal for young individual investors who have adequate time in hand and are willing to invest to meet long-term goal requirements.

Premium payments usually take place via a lump sum.

Premium payments usually take place in instalments during the premium payment tenure.

Usually, there is no growth of investment because there is not much growth period. The payouts here are given out almost immediately.

Allow you to build a corpus amount to stay financially stress-free post-retirement. Thus, there are high returns owing to the deferment period.

Immediate annuity plans are expensive as they start immediately. Use the annuity plan calculator to find out the desired amount based on your affordability.

Deferred annuity plans are reasonable and easy to choose

There are fewer additional benefits because the annuity begins immediately.

Guaranteed returns such as death benefits and annuity payouts are provided because of its long-term tenure, considering the terms and conditions of the policy.

Tax Benefits of Buying Annuity Plans

 For beneficial retirement planning, the government has provided several tax benefits1 towards contributions to an annuity plan. Investments made in an annuity plan are tax-deferred. You can invest a lump sum amount in an annuity plan, and you will be eligible for tax benefits upon payout.  Annuity plans are eligible for tax deductions under Section 80CCC, and Section 80CCD. As per Section 80CCC of the Income Tax Act, 19611, the lump sum amount you invest in an annuity plan is eligible for tax deductions of up to ₹1.5 Lakh. However, the deduction limit for Section 80C, 80CCC and 80CCD is combined and capped at Rs 1.5 Lakh. Payouts from annuity plans are taxed under the head ‘Income from other sources. Finally, an exclusion ratio allows you to defer tax liability on the principal part of your returns.

Which Annuity Plan Should You Choose?

It's essential to choose the right annuity plan, especially when you have multiple options. These plans provide unique benefits catering to the financial needs and objectives of different individuals. Thus, with proper evaluation of annuity plans as per your requirements, you can make an informed decision.

To decide which annuity plan to choose, consider your financial condition and set goals. Moreover, look into certain factors while choosing an annuity plan. The important factors include your age, financial condition, risk tolerance, the kind of annuity plan you want, and investment goals.

Age is an important factor when choosing the type of annuity. Your investment goals should also be prioritised. If you want to receive immediate income, opt for an immediate annuity. Alternatively, go for a deferred annuity to achieve your long-term goals. Your risk tolerance also matters. If you are willing to accept more risk, choose an annuity plan providing a higher rate of return.  

When choosing between immediate annuity vs deferred annuity, you should also check your retirement timeline. If you have very little time to prepare a retirement fund, the former is a good option, and vice versa.

Fees for Annuity Plans

Before purchasing an annuity plan, look into the fees that an insurance company deducts from your payment and cash value. Keep in mind that these annuity charges vary from one product to another. Visit the official insurance provider website to look into the detailed charges for each specific product.

The charges applicable in an annuity plan usually include administration charges, policy allocation charges, and fund management charges.

Key Factors to Consider When Buying an Annuity

Annuities are long-term financial products that provide you with regular income and provide financial stability post-retirement. Irrespective of whether you pay a premium in instalments or lump sum, you should receive annuity income from respective insurance providers.

Let’s look into the following key factors to consider when buying an annuity plan:

  • Expected Returns

Annuities are structured to provide long-term returns post-retirement. However, make sure to consider the effects of inflation. If the rate of return on investment is less than the long-term inflation rate, your purchasing power will decrease over time.

  • Contribution Period

The contribution period of an annuity can extend for years. However, annuitants need to reserve cash to meet expenses during times of emergency and avoid financial loss.

  • Properties of Different Annuity Products

The three most common types of annuity products are life annuities, immediate annuities, and deferred annuities. Thus, before choosing any annuity from the provided list, every single potential annuitant should compare thoroughly the annuity products considering their income, premiums, and income period.

  • Death Benefits

Death benefits are another important factor to consider while purchasing an annuity plan. These benefits are usually included within an annuity contract, thereby ensuring that a beneficiary receives all benefits upon the sudden demise of the annuity holder. Make sure to understand the concept of death benefits and their importance in securing the financial future of individuals and protecting beneficiaries after their death.

These benefits, however, might affect the pricing of annuity plans because insurers can ask for additional charges for the protection they provide to annuity holders.

Summary

To conclude, annuity plans are an effective option to save for retirement. By choosing the right option between immediate vs. deferred annuity, you can maintain financial stability and peace of mind. Gaining a proper understanding of the different types of annuity plans and their respective fees and charges in India is essential to reaching an informed decision.

Furthermore, with the use of an annuity plan calculator, you can plan accurately, ensuring to meet your income needs post-retirement. Investing in an annuity pension provides you with a secured and guaranteed income. Look into your financial goals, retirement timeline and risk appetite to choose the best plan.

FAQs on Immediate Annuity Vs Deferred Annuity

1. What is the primary difference between an immediate annuity and a deferred annuity?

The primary difference between immediate annuity and deferred annuity is based on the time frame when you start receiving the amount. In an immediate annuity plan, you receive a payout immediately once you complete investing. However, in a deferred annuity plan, you receive a payout after the deferred period.

2. What factors should individuals consider when deciding between immediate and deferred annuities?

While deciding between immediate and deferred annuities, the factors necessary to consider for every individual include financial needs post retirement, time left till retirement, savings portfolio, alternate investment options, and the impact of inflation on ROI and your investment plan.

3. How does the payout structure vary between immediate and deferred annuities?

For an immediate annuity, investors receive a payout immediately, while for a deferred annuity, the payout takes place after quite a long time. Thus, if you are not in a hurry to receive a payout post-retirement, go for a deferred annuity.

4. What are the advantages of opting for a deferred annuity for retirement planning?

By opting for a deferred annuity, you can maintain a basic standard of living during retirement years. Alongside, a deferred annuity provides you and your family members with financial stability and security as well as comprehensive coverage for any unforeseen and unfortunate expenses. This will thereby help to experience a relaxed life post-retirement.

5. What are the three types of annuities?

The three main types of annuities are fixed annuities, indexed annuities, and variable annuities.

 

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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 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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