• For each person, planning for retirement is an essential aspect of life, for which he/she seeks methods to guarantee financial independence in later years. An annuity is one such option that individuals can use to arrange funds for retirement expenses.

• Let us explore more about annuities and their significance in retirement planning in this article.

What is Annuity?

• An annuity is an agreement between an individual and a life insurer designed to create a consistent income for life after retirement. For an annuity, a lump sum payment is made by the investor, which is subsequently invested by the life insurance company to provide the returns generated from it.
• At its essence, an annuity is a contract through which you can plan to establish a continuous income at a future time, such as during retirement. In India, individuals purchase annuities to prepare for their retired lives. You should also understand that many people regard it as a type of insurance rather than an investment option.
• Those who struggle to comprehend what an annuity is can consider it a plan allowing them to receive regular payments for life in exchange for a lump sum investment.
• Let us examine its various aspects in detail to define what annuity is and how you can gain from investing in it.

What are the Types of Annuities?

• There are numerous types of annuities for individuals mapping out a reliable income source after retirement. These encompass the following:

1. Deferred Annuity
   It is one of the distinctive types of annuity, which includes a specific period between the premium payments and the annuity payouts. The duration for which a subscriber pays the premium is known as the accumulation phase of these types of annuities.
   Once this phase concludes, he/she utilizes the accumulated amount to buy annuities to receive future payouts.
2. Immediate Annuity
   This category of annuity requires an individual to pay a lump sum as a premium to become a subscriber. After this payment is completed, the payouts under these annuity plans commence immediately according to the pre-established payout criteria.
3. Fixed Annuity
   As the name implies, a fixed annuity is one of the most favored types of annuity selected by individuals in India. Within this annuity plan, the payouts will remain steady throughout the entire duration. It is perceived as a conservative option, with the funds being primarily invested into fixed-income instruments.
   While there is limited growth potential with the principal investment, a fixed annuity is valued as it ensures income to the subscribers after retirement.
4. Variable Annuity
   In these types of annuity plans, the payouts fluctuate from one instance to another. The variations are mainly linked to the performance of the benchmark or the index to which the underlying investment is tied.
   Being index-linked, variable annuity plans cannot assure specific payouts to the subscribers and are thus a riskier choice for many pensioners.

Annual income slab

• An extra surcharge applies above the tax rates indicated in the table above in cases where the annual taxable income exceeds Rs. 50 Lakh. Surcharge rates change according to the income
• An additional health and education cess of 4% is also applicable to income tax and surcharge owed
• Refer to the income tax slab for FY 2020-21 as per the new tax system

• How to Utilize Annuity Calculator?
• Retirement funds and other pertinent organizations acquire annuities according to market conditions. This is where an annuity calculator becomes beneficial. It assists investors in estimating the investments necessary during the accumulation phase to build a desired corpus at the conclusion of the investment period.
• Here are several inputs needed when using an annuity calculator:

1. Income Information
   As an investor, your current annual income is a crucial factor needed to operate the annuity calculator. This is because your current income directly affects your ability to save funds. Furthermore, you also need to input the anticipated income growth rate for the upcoming years
2. Demographic Data
   Your present age and anticipated retirement age serve as data points in the annuity calculator to establish the accumulation phase of annuity. Generally, the sooner you begin investing in an annuity plan, the longer you can remain invested, which will enhance the payouts during retirement
3. Regular Expenditures
   Your existing regular expenses influence the amount you can save or invest over time. If the expenses are minimal, it suggests a high potential for savings and vice versa. Additionally, these expenses are likely to increase, considering the inflation rates
4. Current Savings
   Isolated savings for retirement accumulated early can yield more benefits due to the power of compounding. Therefore, you should take into account the current savings and how they are maintained (in FDs, stocks, or mutual funds) while strategizing for annuity investments
5. Inflation Patterns
   The inflation rate can significantly impact future savings. For example, if the inflation rate increases, you will need to save more to create a specific retirement corpus. Concurrently, the regular expenses are also expected to rise over time, causing the inflation-adjusted returns from investments to appear less substantial.