Retirement planning: 9 key factors that impact your annuity income

We work for our money all over our lives. And so when we retire, most of us don’t want to worry about money. An annuity plan is a retirement option that guarantees a fixed income after retirement. However, the annuity income will vary from person to person. Hence, before taking any annuity plan, it is essential to understand the various factors that impact your annuity income.

Current interest rates

Whether you opt for the monthly or yearly option, the annuity income will depend on the current interest rate. The Reserve Bank of India (RBI) sets the repo rate that influences the interest rate on different investment and loan products.

When the interest rate moves up, the interest on your annuity plan will also be higher. Life insurance companies can offer a higher interest rate as they can get more returns by investing your premium in other market-linked products.

Deposit amount or purchase price

You will receive a higher annuity income if your one-time premium amount or purchase price is high. It is because when the purchase price is high, the specific annuity income earned based on the interest rate will also be high.

Moreover, many insurance companies offer higher purchase price incentives. The price incentive applies per thousand purchase price. For instance, SBI Life Saral Life offers higher price incentives for purchase prices of more than Rs. 5 lakhs. It offers an additional annuity rate (per thousand of purchase price) of 4.25 if the purchase price is more than Rs. 25 lakhs.

Age

Your age will also affect the annuity income. Typically, it is assumed that a young person will live longer than an older person. Hence, if the purchase price is the same, then a younger person will receive a lower annuity as they might live longer and require income for a longer time frame.

Gender

Women receive less annuity income as the average life expectancy of women exceeds men. So, on average, the fixed annuity income will be lesser for women.

Tenure of the annuity

When buying an annuity plan, you have the option to select the tenure of the annuity payout. Most annuity plans offer tenures ranging from a minimum guaranteed period of five years to life. One can also make sure their spouse receives the annuity income after their death. So, your annuity income will be less if you want to receive annuity income for a higher number of years.

Medical condition

If you are comparatively healthy at retirement, your annuity income might be lower than those suffering from medical conditions, as you might have a higher life expectancy.

Single or joint option

Whether immediate or deferred, annuity plans come with single and joint life options. In single life, only one annuitant receives the annuity income. After their death, the nominee receives the death benefits, if any. The plan is closed after the death benefits are provided. However, in the case of joint life, the spouse receives the same annuity income or a certain percentage of the annuity after the primary annuitant’s death.

Hence, annuity income is higher for singles and lower for joint life. Additionally, if you opt for a 100% joint-life annuity, you will receive a lower premium than those opting for a 50% joint-life annuity.

Fixed or constant increase in annuity

Some annuity plans offer a fixed annuity throughout the tenure. However, annuitants can also opt for the option of increasing annuity by 3% or 5% every year. This increase can be simple interest or compound interest. If you opt for a constant increase in annuity income, you might receive less annuity than a fixed annuity plan, as your annuity income has to increase by a specific percentage every year.

Return of purchase price

Annuity plans also offer the option where your purchase price can be returned back to your nominee after your demise. In this option, the annuity premium will be less than the annuity given by the option without any return of purchase price.

While annuity plans offer guaranteed income after retirement, the annuity will depend on certain factors such as current interest rate, age and plan options, among others. So, it would be best to understand how these factors influence the annuity income before buying an annuity plan.

Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.