Immediate Annuity Vs Deferred Annuity: Key Differences

Retirement planning can often be quite complicated, particularly when it comes to selecting the correct investment plan. How can you ensure that the money you've worked so hard to acquire will guarantee a stable and happy retirement? 

Aspiring retirees can look for an annuity plan to financially safeguard their retirement. An annuity helps turn your savings into a steady income post-retirement. But should you let your money grow first or start receiving payments right away? The best option for you depends on your financial situation, as each savings plan offers different advantages. Let's break it down for you in simple terms. 

Types of Annuity Plans 

There are two main types of annuity plans that you can choose from. The first is immediate annuity that offers regular income from day one. The second is deferred annuity that has a waiting period before you start getting your annuity payouts. Below is a detailed breakdown of each type of annuity plan available to you, and how they can benefit your retirement aspirations.  

What is an Immediate Annuity? 

You will get recurring payouts almost immediately if you invest a lump sum amount. This is known as an immediate annuity plan. This is perfect if you are about to retire and require a consistent source of income. 

Key Features of Immediate Annuities 

• Instant Income: After investing, you receive payments immediately in 12 months. 

• One-Time Investment: Guaranteeing lifetime payments requires a one-time payment. 

• Fixed or Variable Returns: You can select fixed returns or returns based on market conditions. 

• Lifelong Security: Provides a consistent flow of income to pay for everyday needs and medical bills in retirement. 

• Minimal Growth Potential: There isn't much time for investment growth because payments start immediately. 

Let's say you retire at 60 with ₹50 lakh in savings. To secure immediate financial stability, you can invest ₹30 lakh in an immediate annuity, which will start paying you annually from the next year. 

What is a Deferred Annuity? 

In contrast, a deferred annuity is a long-term financial investment plan. Rather than receiving returns immediately, you invest money over time and allow it to grow. If your goal is to save wealth for retirement while you are still employed, this plan can be your perfect choice. 

Key Features of Deferred Annuities 

• Delayed Payouts: Usually, payments begin after a specified amount of time upon retirement. 

• Flexible Contributions: You can make recurring contributions over time or invest a large amount of money. 

• Investment Growth: The funds can increase before payouts start because they remain invested. 

• Customised Withdrawals: Select between recurring income or a one-time payment. 

• Tax Benefits: You only pay taxes when you take money out of your investment plan because it grows tax-free. This guarantees tax benefits. 

Let's take an example where you are 40 years old and start investing ₹5,000 a month in a deferred annuity. By the time you retire at 60, you will have built a sizable amount, around ₹36 lakh (excluding returns). This ensures a comfortable life after retirement. 

Immediate Annuity vs Deferred Annuity: What's the Difference? 

The best annuity for you will depend on your demands, as each has different advantages. Here's a brief comparison that can help with your decision: 

Aspect	Immediate Annuity	Deferred Annuity
Premium Payment Structure	One-time lump sum payment.	It can be funded with a lump sum or regular investments.
Timing of Payouts	You start receiving payments within a year.	Payouts begin after a set period, often at retirement.
Purpose & Financial Goals	The purpose is to save for immediate income after retirement.	The purpose is to plan and save for future long-term financial security.
Tax Treatment	Payouts may be taxable, depending on the source of funds.	Investment grows tax-free until withdrawals begin, providing tax benefits.
Investment Growth Potential	Limited, as payouts start right away.	Higher potential for growth over time.

 

How to Choose Between Immediate and Deferred Annuities? 

Your Current Financial Needs 

You can go with an immediate annuity if you require money immediately to pay your bills after retirement. A deferred annuity could be a better option if your goal is to gain long-term benefits. 

Tax Benefits 

Deferred annuities are advantageous for tax benefits because they provide tax-free growth until you begin taking withdrawals. On the other hand, when payouts start, immediate annuities are taxed like regular earnings. 

Investment Growth Potential 

Deferred annuities provide you with an advantage if you want larger returns. This is because they let your money grow before payouts begin. Your investment does not grow with immediate annuities since they have no growth phase. 

Risk Appetite 

If you want guaranteed payments and prefer low risk, an immediate annuity is a good choice. If you're okay with higher risk for bigger returns, you can choose a deferred annuity plan that offers market-linked returns. 

Conclusion 

The main goal of a retirement plan is to find what works best for you. Some people prefer to let their money grow before withdrawing it. Others want the security of getting payments right away. The right annuity ensures you have money when you need it, giving you peace of mind. 

Take your time, consider all your options, and select a savings plan that best suits your long-term goals. After all, a thoughtful choice can significantly impact the growth of your wealth.