InvestorQ : What is annuity? What does it mean in the context of pension plans?
Gauravi Patel made post

What is annuity? What does it mean in the context of pension plans?

seema Upadhyaya answered.
3 years ago

The dictionary defines annuity as a fixed sum of money paid to someone each year, typically for the rest of their life. Thus it is a form of insurance or investment that entitles an investor to a series of annual sums.

An annuity plan is a type of insurance which starts paying you an income from the start as per the various options chosen by you.

In the context of a pension plan, annuity is the amount that an insured individual receives from his/her corpus after the pay checks/income stops coming. The annuity amount helps an individual allocate some part of his/her savings to accumulate money and over a period of time, these funds offer the insured individual with steady income post his/her retirement.

A few annuity options available under pension plans are:

Annuity certain or guaranteed period annuity: Here, the insured individual is paid an annuity for a certain number of years like five, 10, 15, or 20 years and thereafter for life, if he survives. The annuity for the fixed years, however, would be paid to the beneficiary or nominee, if the annuitant dies before exhausting all the payments during the fixed years.

Life annuity/life annuity with spouse/life annuity with return of purchase price: Here, pension is paid to the annuitant until death. However, in case of death of the annuitant, the pension amount would be paid to the spouse, if the annuitant had selected the option to pay the annuity to the spouse. Under the return of purchase price option, the annuity purchase price is paid to the nominees of the annuitant.

National Pension Scheme (NPS): Under this option, you can invest money in the NPS, which would be further put into equity and debt market as per your choice. You can withdraw around 60% of this amount on retirement and 40% can be utilized to purchase annuity. Do note, that the amount you receive on maturity is NOT tax-free.