Immediate Annuity: How It Works, Benefits, And Is It Right For You?

An immediate annuity is a single premium retirement plan. You receive a guaranteed income for a specified number of years or for the rest of your life. This is possible if you have a ready corpus. For example, a lump sum savings or an investment that can be liquified. There is no accumulation period or contribution limits. The insurance company starts making payments like an ongoing income stream. An immediate annuity is a good way to supplement the current earnings in a tax-deferred (except GST) manner. Here’s a detailed overview.

What is Immediate Annuity?

It helps you convert a big amount into an annuity. Now you can receive ‘immediate income’. The payment is disbursed right away but most likely starts within a month of purchase. At the vesting stage, when the corpus will be paid for pension commutation, it will be tax-deferred. But some tax amount gets imposed on the earned amount when the payments are annuitized. This is based on the Income Tax Act rules. The principal, that is the initial deposit amount, is free of taxes. 

Immediate annuities can be both fixed and variable. The fixed annuity is fixed to the amount you invest, age and interest rate at the time of purchase. The payments will not fluctuate. But variable annuity payments will vary with the chosen investments.

Benefits of an Immediate Annuity

There are several advantages that make an immediate annuity policy a great product simply in exchange for a significant amount of cash. Here’s a look:

1. Long-term stability and independence.
2. Stable earnings which are especially helpful post-retirement.
3. The income is disbursed within the minimum possible time.
4. No need to monitor the investment manually.
5. Payments can be higher than returns on other investments like certificates of deposit.

An immediate annuity is a safe and secure product. You can easily add a death benefit rider so that your beneficiary can get a portion of the value in your absence. This would be the amount you’re paid along with the investment earning. The cash withdrawals will be deducted if any. Fixed annuities usually lower fees. Else, the charges vary based on the annuity type.

Should You Get One?

Now that you know what is an annuity, it is a good idea to consider the investment. It can assure a steady and hassle-free income for a comfortable lifestyle. Annuities act as a great balance to your financial portfolio while ensuring monetary freedom and independence in your golden period. But an annuity may not be right for everyone. For example, if you have sufficient income to maintain your living costs you are less likely to need an annuity.

Buying an annuity is a sensible choice to secure your future. You can purchase it either in your senior years or mid-career as per your life goals. Know if the liquidity features are chargeable to avoid any surprises later on. It is a good idea to work closely with experts to maximise the annuity policy.