Annuity

An annuity turns a lump sum into a stream of regular payments. You pay a one-time purchase price to a life insurer, and it pays you — monthly, quarterly or yearly — for the rest of your life or for a fixed term, at a rate set when you buy. Variants can continue payments to a spouse, return the purchase price to nominees, or raise payments each year.

Why it matters

An annuity addresses the hardest retirement risk to plan for: living longer than your money. Unlike an SWP from a corpus, a life annuity keeps paying for as long as you live. In NPS, part of the corpus must buy one at normal exit.

How to read it

• Options change the rate. A life-only annuity pays the most per rupee; adding return of purchase price, joint life or yearly increases lowers the payout.
• The rate is locked at purchase. It depends on interest rates and your age when you buy, and usually does not change afterwards.
• Inflation. A level annuity loses purchasing power over a long retirement unless you choose an increasing option.
• It is hard to reverse. Most annuities cannot be surrendered once payments start, or only on restrictive terms.

Common misconceptions

• “An annuity is an investment that grows.” It is primarily protection against longevity, not a growth asset.
• “Annuity income is tax-free.” Under current rules, annuity payments are generally taxable as income at your slab rate.

In India: Annuities are issued by life insurers regulated by IRDAI. CompoundX does not quote annuity rates; insurers publish them for each option and age.