What is annuity
Source: Tavaga Research

Annuity is a financial product that pays a fixed income at predefined intervals over a period of time, in lieu of premium paid in installments or as a lump sum. The period of time for annuity payments is often one’s retirement years or after reaching a certain age in life.


An annuity insurance product or a pension plan

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An annuity is a preferred risk management tool for retirees or the older population as it mitigates the risk of running out of assets to fall back on in the later years. The annuity payments to the customer are guaranteed by the insurance company which has issued the product.

Annuity products can have features like fixed/variable income (payments), and immediate/deferred payments

Valuation of annuity

Valuation of annuity involves calculating the present value of future annuity payments

Types of annuity

Annuity differs on the basis of time of payments, variability on payments, etc.

Annuity-immediate – In the this the payment is made at the end of the payment period

Annuity-due – payment is made immediately after the issue of annuity

Contingent annuity – annuity is paid only under certain contingent circumstances

Fixed annuity – A fixed amount of money is paid at the end of a specified period

Equity indexed annuity – the amount of annuity depends on the performance of the equity index fund to which the annuity is linked

Deferred annuity – The payment is made only after a certain period of time

Formula for calculating present value of annuity that involves fixed amount of payment

PV formula
Source: Tavaga Research

Can one lose money in the annuity?

Yes, In case of variable annuities whose payment depends on the performance of market index or various other factors. Also, there are penalties for early withdrawal in case of annuity insurance. Although one can withdraw money if the policy specifies such withdrawal in case the policyholder is detected with a special critical illness or on the death of the policyholder, a certain amount is paid to the nominee as per the T&C. 

What is the minimum and the maximum age to buy annuities?

It depends on the policies of different annuity providers. For ex- In the case of ICICI Prudential, the minimum age to buy an annuity is 30 years and the maximum age is 100 years.

There can be single as well as joint annuity. Only annuity gives the option for a lifetime payment as well as the option of getting back the full amount of money invested during the free time period after entering the contract. 

Some of the famous annuity plans are:-

  1. HDFC life new immediate annuity plan
  2. Birla Sun Life India (BSLI) Immediate annuity plan
  3. Reliance Immediate annuity plan

What is the difference between Jeevan Akshay and Jeevan Shanti?

While Jeevan Akshay is an Immediate annuity plan, Jeevan Shanti has the option of both, Immediate and Deferred annuity. One with a high taxable income should go Jeevan Shanti Deferred annuity plan. 

Most popular kind of annuity is in the form of Pension Plans. Annuity is definitely beneficial for senior citizens as it provides them with a guaranteed amount of income at the end of a certain time period as well as they are tax efficient.