5 things you didn’t know about annuity plans

Annuity plans are excellent retirement planning schemes – but do read up on these facts first.

If you are about to buy an annuity plan for your retirement, do read up on the following facets of this investment option that you were probably not aware of –

1 The annuity plan has two stages.

There are 2 stages in the annuity plan – the accumulation stage, and the vesting stage. In the former, you pay annualised premiums towards the plan till you reach retirement age. After this begins the vesting stage, where the accumulated corpus is slowly distributed back to you as a series of annuities. These are paid to you till the time of your demise, or on the demise of your nominee.

2 You can get taxed on the annuity plan.

Though the premiums paid towards the annuity plan are tax deductible under Sec 80CCC up to Rs 1 lakh per year, the withdrawals against the plan are taxed. Many pension plan holders are not aware of this fact at the time of investing in it. The best annuity plans in India calculate about one third of the distributed annuities as tax free, while the rest is taxed at the applicable tax rate at the time of retirement. It is important to know the tax deduction before you allocate the annuity – an annuity calculator can help you crunch the numbers.

3 Positive returns are guaranteed on the plan.

You cannot predict the fixed return on the retirement savings, across even the best annuity plans in India. However, you are guaranteed a positive return rate on your invested sum of money. At the very least, you are guaranteed at least 101% of the total premiums that you pay towards the pension plan. Do use an annuity calculator to make your calculations before you buy the plan.

4 You can choose between the kinds of annuity plans you wish to invest in.

Gone are the days when insurance providers had a generic pension plan to sell customers. Today, you can choose between a traditional pension plan, a ULIP, or a hybrid pension plan. A traditional annuity plan invests mostly in debt instruments and is designed for risk-averse investors. A ULIP invests in both equity and debt and offers good growth over the long run. Meanwhile, a hybrid pension plan offers an investment mix that is altered at different cycles of the investment journey at your discretion.

5 You cannot withdraw the entire corpus upon retirement.

Contrary to popular belief, the entire accumulated corpus on the annuity plan is not up for grabs when you retire. You cannot withdraw the entire sum; only 1/3rd is withdrawn and the rest is granted as annuities in the form of monthly or annual payments. So, if you are banking on the accumulated corpus to see you through a future financial need, you must plan differently.

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