Annuity plans turn your savings into a regular pension for life. Learn what purchase price, immediate and deferred annuity, and joint life options mean.
Government and some private jobs come with a pension, but most people in India, such as shopkeepers, farmers, traders and self-employed professionals, have no fixed income after they stop working. Pension and annuity plans help fill this gap by turning your savings into a regular income, often for the rest of your life.
What is an annuity?
An annuity is simply a regular payment you receive from an insurance company, monthly, quarterly, half-yearly or yearly, in exchange for a sum of money you give it. The person who receives the annuity is called the annuitant.
Think of it as "buying a pension". You hand over a lump sum, and the insurer promises to pay you a fixed amount at regular intervals as per the option you choose.
What is the purchase price?
The purchase price is the money you pay to buy the annuity. In many LIC annuity plans this is paid in one go (single premium). For example, you might use part of your retirement savings, the sale proceeds of land, or the maturity amount from another policy.
The size of your pension depends mainly on:
- the purchase price
- your age when you buy
- the annuity option you choose
- how often you want to be paid
The annuity rate applicable to you is fixed at the start of the policy as per the plan's terms.
Immediate vs deferred annuity
| Type | When pension starts | Suits |
|---|---|---|
| Immediate annuity | Right away, from the next payment period | People who have retired or need income now |
| Deferred annuity | After a waiting period (the deferment period) | People a few years away from retirement |
With a deferred annuity, you pay now and the pension starts later. The waiting period usually results in a higher pension than an immediate annuity bought with the same amount at the same age.
Single life vs joint life
- Single life annuity: the pension is paid while the annuitant is alive.
- Joint life annuity: the pension continues for a second person, usually the spouse, after the first annuitant dies.
Joint life is very useful for married couples, because it protects the surviving partner from suddenly losing income.
Common annuity options
Annuity plans offer several options. Two common ones are:
- Life annuity: you receive the highest regular income, but on death the payments stop and nothing is returned to the family.
- Life annuity with return of purchase price: you receive a somewhat lower income, but on your death the purchase price is paid back to your nominee as per the policy terms.
Other options may include annuities that increase every year or that continue for a guaranteed number of years. The right choice depends on whether you want maximum income for yourself or money left for your family.
A simple example
Illustration only, not a quote.
Mr. Sharma, aged 60, receives ₹10,00,000 at retirement. He uses it as the purchase price for an immediate joint life annuity with return of purchase price, covering himself and his wife.
- He receives a fixed pension every month for life.
- After he passes away, his wife continues to receive the pension for her lifetime.
- After both have passed away, ₹10,00,000 (the purchase price, as per policy terms) is paid to their nominee, such as their son.
The actual pension amount depends on age, option and the annuity rates at the time of purchase.
Unit-linked pension in brief
Some pension plans are unit-linked. Here, your contributions are invested in market-linked funds during the saving years, and the accumulated value is later used to buy an annuity. These can grow more over long periods, but the value can also fall, and the investment risk is borne by the policyholder. Read our ULIP explainer to understand how unit-linked products work.
Points to keep in mind
- Annuity income is usually fixed and does not rise with inflation unless you choose an increasing option.
- Once an annuity starts, the option generally cannot be changed, so choose carefully.
- Keep some money aside for emergencies; do not put all savings into an annuity.
- Tax on pension income depends on prevailing tax laws and the regime you choose.
Which LIC plans are of this type?
LIC offers LIC's Jeevan Akshay-VII (857), a single premium immediate annuity with 10 options including return of purchase price and joint life, and LIC's New Jeevan Shanti (758), a single premium deferred annuity with a deferment period of 1 to 5 years. See all options on our pension plans page, and plan your needs with the retirement calculator.
Planning your retirement income? Talk to us for a personalised annuity quote.