Annuity

An annuity is an insurance contract that converts a lump sum (or a stream of premiums) into a guaranteed periodic income — usually monthly, for life or for a fixed term. It is the mirror image of life insurance: instead of protecting against dying too early, it protects against living too long and outlasting your savings. Every annuitant essentially pools longevity risk with others, which is why the insurer can pay a higher rate than a simple fixed deposit of equal amount.

The main variants are immediate (income starts at once) versus deferred (income starts later), and life-only versus joint-life versus return-of-purchase-price. In India, NPS subscribers are required to use at least 40% of their Tier-1 corpus to buy an annuity from an empanelled insurer at age 60; quoted rates are in the 6–7% band. Example: a ₹1 crore annuity at 6.5% return-of-purchase-price pays ₹54,000/month for life, with the ₹1 crore returned to nominees on death. Inflation-linked annuities exist but carry a 1–1.5% lower starting rate.

The downside is illiquidity (the principal is locked up) and nominal rate risk (a fixed 6.5% loses real value in high-inflation decades). Annuity income is fully taxable at slab rates in India.

Model the income/corpus trade-off between an annuity and a systematic withdrawal plan using our SWP calculator before committing at retirement.