Financial advisors often advise young investors to choose lumpsum payment over annuity in case of retirement schemes. However, for middle-aged or older pension policy holders, annuity option makes more sense since it ensures a guaranteed return at regular intervals.
But one must understand that after having chosen an annuity, you cannot alter it. So, it is vital to understand the features of different categories of annuities before making the final choice.
Different options of annuities:
Life annuity: Under this category, the annuity will be payable at uniform rate for the remainder of life of annuitant. After the demise of policyholder, the payments will stop.
For instance, if a policy gives annuity at the rate of 7 percent, then a ₹10 lakh purchase price policy will offer a return of ₹70,000 per annum income for life. One drawback of this policy is that nothing is left for your nominee/dependents. All top life insurers, including HDFC Life, SBI Life, ICICI Prudential Life and Bajaj Allianz Life offer life annuity income.
There are some variants of life annuity where policy holders are promised a guaranteed period for say, 10, 15 or 20 years. This means, the annuitant is given annual payment until s/he is alive. But if the policy holder’s demise takes place after the expiry of this period, the nominee is not entitled to receive anything.
Return of purchase price: In this category, annuitant stands to receive annual payments and after the death of policy holder, the nominee also gets the purchase price. But is noteworthy that the amount of annuity declines since the insurer commits to return the purchase price to the nominee. For instance, ICICI Prudential Guaranteed Pension Plan offers ₹67,741 yearly without return of purchase price, but the annuity declines to ₹60,235 in case of ROP (return of purchase price) to nominee.
Then there are other variants also such as life annuity with return of balance purchase price. In this, annuities are paid during the lifetime of annuitant, but after his/her death, the annuity payments will cease and nominee gets the balance of the purchase price. This means purchase price minus all annuity instalments that are made before the death of annuitant.
Increasing annuity: There are some insurers which give you an alternative in form of increasing annuity. In this, the annuity increases by anywhere between 3 to 5 per cent every year. For instance, Jeevan AkshayVII offers annuity for life that increases at a rate of 3 per cent per annum. HDFC Life, at the same time, offers increasing annuity at 5 per cent per annum. Also, SBI Life Annuity Plus gives lifetime income along with increase of 3 or 5 per cent per annum.