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Sunday, May 1, 2016

Retirement Saving - Immediate Annuity vs Deferred Annuity

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With the Budget proposing tax on Employees' Provident Fund and the U-turn by the government that followed, people started looking for several retirement savings options. Whether one invests in EPF, PPF or NPS, at the end of the term he will have to rely on annuity -immediate annuity or deferred annuity. We try to decode the pros and cons of the two.

1. How does one define immediate annuity plan and deferred annuity?

An immediate annuity plan is purchased with a lumpsum. People who want to start their re tirement payout opt for immediate annuity . It offers guaranteed in come that starts almost immediately for either a limited period or till perpetuity . Deferred annuity helps people save for the future and the annuity starts after a certain date. However, an individual can opt to convert deferred annui ty into immediate when he wants to start collecting payments. There are various options on an nuities available from guaranteed period to lifetime payments.

There are also joint an nuity plans where the spouse gets payout after the demise of the indi vidual.

2. What should you look for while buying annuity?

Annuities help people plan re tirement sav ings. Payout in annuity depends on whether the individual has opted for fixed or variable in come. If a 30-year-old is looking for monthly in come of `1 lakh per month on retirement at 58, he will have to invest `16,000 per month, as suming 8% return.

3. What are the tax benefits of buying an annuity plan?

Money invested in annuity plan is tax exempt. Also, money in vested for annuity is tax exempt. One can withdraw 25-33% at the annuity , and this amount is exempted from tax. However, income on plan is taxed under the income tax rate. In case of senior citizen, tax is not applicable if the income is below the tax slab limit.However, if any senior citizen has taxable income than advance tax provisions will be applicable.

4. What are the charges on insurance annuity plans?

Life insurance companies sell annuity plans. There are vari ous charges including fund management, policy administration and policy allocation on unit-linked pension plan. Charges on traditional pension plans are not disclosed. In the similar category , new pension system has the lowest charges of 0.25%.

5. What are the penalties for withdrawing from the plan?

If one withdraws money early, the amount withdrawn is tax able. In case of unit-linked pension plan, one can withdraw only after five-year lock-in period. The other limitation of the plan is that one will have to buy annuity from the same insurer that one buys insurance plan from.

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