Immediate vs. Deferred Annuity Plan: Key Differences

An Annuity plan is a financial tool designed for retirement planning, providing a regular source of income. It acts as a contract between an insurance company & an investor, which requires the investor to make payments, either in a lump sum or regular instalments. Against which insurance company releases regular payouts either on an immediate or deferred basis. Annuity plans offer a secure & stress-free retirement period, ensuring a guaranteed, regular, & lifelong source of income. An annuity plan can be chosen depending on the requirements of the family & investment horizon. Once you have understood the Annuity Meaning, it’s time to learn about the two main types of annuity plans, namely Immediate & Deferred. Let us discuss them in detail in this article.

What is an Immediate Annuity Plan?

Under this plan, payouts are received immediately after the initial investment is made. This plan is best suited for those individuals who are close to retirement & want to receive a regular source of income. This plan includes a regular pension immediately after it is purchased, i.e. no deferred payments.

What is a Deferred Annuity Plan?

Under this plan, the amount is invested for a fixed period of time before the payout starts. This plan is best suited for those individuals who are about to retire in the next 10-15 years. This plan also includes insurance coverage, where a portion of the sum assured is paid to the beneficiaries in case of the unfortunate demise of the policyholder.

Difference between an Immediate Annuity & a Deferred Annuity Plan

Features of an Immediate Annuity Plan

• Instant Income: It includes the receipt of payments on an immediate basis. One can also use an Annuity Calculator to ascertain the amount of income that would be received either monthly or annually against the amount invested in a lump sum.

• One-Time Investment: This plan includes a single one-time payment against guaranteed & assured lifetime payments.

• Fixed or Variable Returns: It includes both options of receiving the returns, i.e. either fixed or variable (market-linked).

• Lifelong Security: These returns provide you with a regular & consistent source of income, which helps to meet routine expenses post your retirement. 

• Minimal Growth Potential:

  As the payout starts immediately after investment, it leaves no scope for growth.

Features of a Deferred Annuity Plan

• Delayed Payouts:

It includes payouts to be released at a certain future predetermined date.

• Flexible Contributions: It includes payment of the premium either in a lump sum or through regular contributions.

• Investment Growth: These investments include growth factors before the release of payouts, as they have time to grow.

• Customised Withdrawals: It offers you flexibility to receive payouts, i.e. regular payouts or in a lump sum.

• Tax Benefits:

The premium paid towards the plan is eligible for a tax deduction of up to INR 1.5 lakhs u/s 80C. Additionally, the returns earned are tax-deferred, which means no need to pay tax till the funds are withdrawn. It allows tax-free withdrawals up to 60% of the funds accumulated. 

Immediate Annuity or Deferred Annuity – Which One to Choose?

Once you have understood the differences between the two plans, choosing between them is quite challenging. Here is a simple way to select: 

A. Opt for an Immediate Annuity Plan if:

• Your retirement is approaching, & you expect a guaranteed flow of income.
• You have a lump sum amount to be invested.
• You do not want your savings to get exhausted sooner.
• You prefer a convenient & simple-to-understand & plan.

B. Opt for a Deferred Annuity Plan if:

• Your retirement still has time left, & you want to build a retirement corpus.
• You want to invest in tax-deferred growth opportunities.
• You want to decide the time period from when the income is to start.
• You have enough funds available to save for retirement. 

How to Choose Between an Immediate & Deferred Annuity Plan

Provided are the factors that can be considered while choosing between an immediate & deferred annuity plan:

• Your Current Financial Needs 

Depending on your financial requirements, you can decide to either opt for an immediate or deferred annuity plan. If you want funds instantly, opt for an immediate plan; otherwise, opt for a deferred annuity plan.

• Tax Benefits

In case you want tax benefits, a deferred plan is better, as taxes can be deferred till the time funds are growing. Under an immediate annuity plan, payouts start immediately, hence attracting taxes.

• Investment Growth Potential 

If you want growth in your funds, opt for a deferred plan, as they allow your funds to grow, hence offering higher returns.

• Risk Appetite 

If you prefer low risk, opt for an immediate annuity plan, & if you want high risk against high returns, opt for a deferred plan, which is linked to the market.

Conclusion

Annuity plans are considered to be one of the best options for retirement planning, which provides financial stability & an assured income. While considering both the plans, namely, immediate & deferred annuity plans for retirement purposes, one should take into consideration the associated charges, returns, & death benefits that best suit one’s retirement objectives. Both plans have their own pros & cons; understanding the differences mentioned above helps in making an informed decision.