Knowing how each option works can help you balance stability with long-term protection.
Annuity plans are designed to turn your retirement savings into a steady monthly income that lasts for life. Unlike market-linked options, annuities offer predictability. But not all annuities are created equal — the right plan can protect both you and your spouse, while the wrong one might leave you with shrinking value as prices rise. Knowing how each option works can help you balance stability with long-term protection.
Immediate vs deferred annuity
In an immediate annuity, income starts right after you invest a lump sum — usually within a month. It’s ideal for retirees who want regular income right away. A deferred annuity, on the other hand, begins payouts after a few years, allowing your corpus to grow in the meantime. This option suits those nearing retirement who want guaranteed income later.
Single life vs joint life annuity
A single life annuity pays income only until the policyholder’s death, after which payments stop. A joint life annuity continues to pay your spouse after you’re gone, often at the same or a reduced percentage of the original income. If your spouse depends on your pension, a joint life plan is worth the slightly lower initial payout it offers.
With return of purchase price (ROP)
Annuities with “return of purchase price” return the original investment amount to your nominee after your death. Without this feature, payments stop entirely once the annuitant (or both in a joint plan) passes away. ROP options are popular because they offer peace of mind to families, though monthly payouts are usually lower.
Beating inflation with step-up or linked plans
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The biggest drawback of traditional annuities is that payouts remain fixed while inflation keeps rising. To offset that, insurers now offer “step-up” annuities, where the payout increases by a small percentage — say 3 percent to 5 percent — each year. Alternatively, you can choose an annuity linked to government securities or market returns, though these may fluctuate more. Mixing annuities with mutual fund SWPs can also balance safety and growth.
Tax and timing considerations
The lump sum used to buy an annuity (often from your NPS corpus or pension savings) is partly tax-free at withdrawal, but the monthly income itself is taxable at your slab rate. To maximize efficiency, invest in annuities when you expect your income to fall into a lower tax bracket — typically after retirement.
The takeaway
An annuity isn’t about the highest return — it’s about security you can count on. A well-chosen joint life, return-of-purchase-price annuity can protect your spouse and ensure steady income for life, while supplementing it with step-up options or SWPs helps you stay ahead of inflation. In retirement, peace of mind often matters more than chasing yield — and a good annuity gives you exactly that.