4 Advantages & Disadvantages of Annuity Plans     

Most people who work do it with just one long-term goal in mind – a secure and comfortable future. It’s a fact that the future is uncertain, but you still need to infuse some certainty into it. Simply relying on the government-backed PF scheme cannot be a solution here. This is where post-retirement plans come into the picture.

As a young working individual, you have a lot of time to figure out which are the best retirement plans for you. However, if you are nearing the retirement age, you need to not only carefully assess different types of retirement annuities but also whether you need one or not.

Here are a few advantages and disadvantages of annuity plans that will help you get a better idea about such plans.

Advantages of Annuity Plans

Here are the advantages of annuity plans:

  • Uniform inflow of income

At the time of retirement, you want to maintain the same level of comfort and financial security that you had before retirement. This is where a retirement annuity plan works perfectly. These plans provide you with a regular payment mechanism in such a way that you do not miss your regular salaried income. Some plans, such as the Tata AIA pension plan, also have provisions for multiple payout amount options along with different durations – annual, half-yearly, quarterly and monthly.

  • Safeguard against Inflation

In a growing economy like India, the price rise is always an issue. It cannot be controlled, so the only thing left to you is to find a plan that safeguards you from the rising inflation. You do not want your monetary value of savings to decrease once you retire. So, this is where annuity plans come in. Whether it’s an immediate annuity plan or a deferred annuity plan, these funds are designed to protect you from the inflations and their adverse impacts.

  • Saves Taxes

One of the biggest pros of the annuity plan is that it serves as your tax-saving investment scheme. By investing the premium in the annuity plan, you get a tax exemption under Section 80D of the Income Tax Act. This exemption is up to a maximum limit of 1.5 lakhs.

  • Principal Protection

Whether you opt for retirement plans or any other income plan, you do not want your principal to be reduced. So, even with annuity plans, your principal is secured. In fact, some smart annuity plans like Tata AIA smart annuity plan also have the option of getting a loan on the investment amount.

Now that we have briefly discussed the advantages let’s have a look at the disadvantages.

Disadvantages of Annuity Plans

Here are the disadvantages of annuity plans:

  • Inflexibility in annuity plans

While principal protection serves as an advantage, it also proves to be disadvantageous to some. It does not allow you to withdraw any amount of funds before maturity. So, the only option left is to take a loan, which again is not favourable to many individuals. Moreover, if you compare annuity plans with Senior Citizen Savings Scheme (SCSS), annuity plans seem to have disadvantages because SCSS allows premature withdrawal with a penalty, but annuity plans do not.

  • Limited Rate of return

Annuity plans may have multiple payout options, but even its maximum cannot match the other equity-linked investment products. In fact, an investment in a suitable fund or stock market can fetch better returns without getting into much risk.

  • High cost

Every fund that is managed by anyone other than you comes at a cost. So is the case with annuity plans. However, in this case, the cost is usually on the higher side. This may be because it is someone’s life’s savings. But, still, if it is compared to other funds, the fees and commission are too high.

  • Taxes

As already discussed in the advantages that annuity plans serve as a tax exemption scheme. However, it is also a disadvantage with respect to income tax. The annuity plan payouts are considered as a form of salary/income, so it attracts income tax. However, the only small relief here is that tax slabs for those above 60 are higher than the normal tax slab.

Key Takeaways

Annuity plans can be a useful source of regular income even after retirement. Nonetheless, it’s important you understand the plan and check other options as well. There are instances where people invest a part of their life savings in annuity plans, and other parts in other instruments. So, if you have any more questions related to annuity plans or other investment instruments in general, feel free to reach out to us.