At a time when the global financial meltdown thre-atens to upset all your investment plans, immediate annuity plans, sold by life insurance companies, can provide some respite.

An immediate annuity works like a guaranteed monthly pension income. However, the amount of the monthly income will vary depending on your age and the interest rate at the time of purchasing the annuity.

It will also vary depending on the option you choose for receiving the income. You may opt for a monthly income for your lifetime and not want your purchase price back; or you may want the purchase price to be returned to your nominee after your death.

You pay the insurer a lump sum and you have the option of receiving the income every month, quarterly, half-yearly or annually. If you choose the monthly mode, the annuity rate will be slightly less than the annual payment.

Unlike a traditional pension plan, here the income payments start immediately.

A traditional pension plan is a deferred annuity option where you keep on adding to your pension fund through regular premium payments.

When you arrive at the vesting age, you buy annuities with the corpus in the pension fund.

Immediate annuity should not be confused with deferred annuity in which you save for a steady income after retirement. Immediate annuity should be considered as a complement and not a supplement to your current income.

Know your needs

You should first decide which income option is best suited for you. If you choose a plan in which you will get the income throughout your lifetime without claiming capital return, you’ll get a higher monthly payment than in the case where your capital will be returned to your nominee or your spouse will get the annuity income after your death.

In the case of a joint life option, your spouse or nominee continues to get the income after your death.

Take, for example, the annuity rates of a leading private sector life insurance company.

If you are 45 years old and opting for a life annuity option, you’ll get an annual income of Rs 16,213 (or a monthly income of Rs 1,277) for a sum assured of Rs 2 lakh. But if you choose a joint life option, you’ll get an annual income of Rs 15,457 (or a monthly income of Rs 1,216). For return of capital on death of the annuitant, the annual income will be Rs 14,612 (or a monthly income of Rs 1,150).

Insurer selection

Once you zero in on the payment option, select an insurer giving the highest rate of return. This can be a bit tricky as insurers do not provide instant quote of their annuity rates on their websites to enable a prospective buyer to compare the rates.

You can visit the office or contact an agent of the insurers to get a fair idea of their annuity rates.

On the brighter side

You may be wondering why you should buy an annuity plan when you still have many years of service left.

The reason is annuity income is guaranteed and the stream of income accrues over a longer period of time compared with other instruments such as bank fixed deposits or small savings schemes.

Moreover, by buying annuities at the current rate you can do away with interest rate fluctuations in the future. This benefit is not available in any other fixed income options — interest rates in all fixed income instruments are reset after every few years.

Thus, an immediate annuity plan not only ensures a regular flow of income for yourself but also your spouse. This will help you plan your investments more prudently.

Let us explain how. Assume that you have an investible surplus of Rs 2 lakh. If you buy a immediate annuity for joint life, you shall get an annual payment of Rs 15,457 or a monthly payment of Rs 1,216. However, it is advisable to go for the annual payment mode because in that case you shall get a higher rate.

Deposit this annual annuity income in a bank savings account. If you are averse to risk, open a recurring deposit account by transferring Rs 1,288 every month (Rs 1288 x 12 = Rs 15,457).

At the current interest rate of 8.5 per cent for a 10-year deposit, you can earn nearly Rs 2.50 lakh, while your original investment of Rs 2 lakh in the annuity plan remains intact.

However, this strategy may not help you save tax as you shall have to pay income tax on both the annuity income and on the interest income from the recurring deposit account.

But, if you save Rs 15,457 every year in a PPF account, you can claim tax deduction on the entire amount under section 80C of the income tax act, while you shall have to pay an income tax of Rs 4,776 on the annuity income (assuming that you are in the highest tax bracket). Thus, you save Rs 10,681 in terms of the total income tax outgo.

Moreover, at an interest rate of 8 per cent, your PPF account will grow to Rs 4,53,265 in 15 years.

If you are looking for a higher return with similar tax advantages, investments in equity-linked saving schemes through systematic investment plans is also a great option.