While planning for retirement, one looks for financial protection, stable returns, safety, & a continuous source of income. You may come across certain plans that offer stable income, such as fixed deposits or an immediate annuity plan. While they serve different purposes, both of them provide assured returns. A fixed deposit offer assured returns; on the other hand &, an immediate annuity plan offers a continuous flow of income post retirement. Selecting the Best Annuity Plan ensures a continuous source of income, whereas fixed deposits offer guaranteed returns for a fixed tenure.
What is a Fixed Deposit?
A fixed deposit is a type of savings plan issued by financial institutions or banks, where funds are deposited for a certain period of time ranging from a few days to several years. In return, banks pay investors the maturity amount along with a specified interest rate, which is normally higher than that on a savings plan. They are low-risk investments with guaranteed returns.
What is an Immediate Annuity Plan?
An Annuity is a long-term plan where an individual invests their funds either in instalments or in a lump sum. &, the insurer Company releases a payout amount, either variable or fixed, for a fixed period or for a lifetime. It is a contract in which funds are invested either in instalments or in full to get a regular payout amount, either for a fixed number of years or for a lifetime. After learning What is Annuity Plan, let us understand & one of its most popular types, the Immediate Annuity Plan.
Under this type of annuity plan, a lump sum amount is invested to start with a regular payout within a month or so. This plan is considered ideal for those nearing retirement who want to receive either fixed or variable payouts, as well as a regular source of income to meet routine expenses. You will start receiving regular payouts immediately, i.e., within a month of the investment being made, making it a good option for retirees.
Difference between a Fixed Deposit & an Immediate Annuity Plan
Provided are the differences between an Immediate Annuity Plan & a Fixed Deposit:
| Basis of Difference | Fixed Deposit | Immediate Annuity Plan |
| Investment amount | Amount remains fixed | No limit, hence flexible |
| Liquidity | On the completion of its tenure | Monthly |
| Tenure Period | Flexible | Flexible |
| Early Withdrawal | Not allowed, but can be done with penalties | Flexible options |
| Tax | On Interest earned | On the amount of payout |
| Risk on Investment | The change in interest rate does not impact the amount of returns, because the interest rate remains stable. | Due to fees, charges, & commissions, the overall income amount gets reduced. |
Advantages of a Fixed Deposit
Provided are the advantages of a Fixed Deposit:
- Fixed deposits offer guaranteed returns with high rates in comparison to a savings account.
- Tax savings payouts come with a lock-in period of 5 years, under which tax exemption can be availed up to a maximum of INR 1.5 lakhs.
- Fixed deposits get renewed automatically on maturity without any need to visit a bank.
- Multiple fixed deposits can be opened at different banks, allowing you to save funds for a certain period.
- These deposits are easily accessible both in private & public banks. Internet banking facility can also be used to open a fixed deposit account.
- It comes with a flexible tenure ranging from 7 days to 10 years, which makes it suitable for both short-term & long-term objectives.
Disadvantages of a Fixed Deposit
Provided are the disadvantages of a Fixed Deposit:
- The interest received is taxable according to the income tax slab, reducing the returns.
- FDs do not match the inflation factor, hence less growth.
- In case of premature withdrawal, penalties are charged.
- It offers a constant rate of interest, hence limited growth.
Advantages of an Immediate Annuity Plan
Provided are the advantages of an Immediate Annuity Plan:
- One-time Investment: It is a simple-to-understand & process which requires one lump sum payment only.
- Flexible Purchase Price:
It offers you a choice to decide the amount of investment, i.e. the purchase price, making the plan flexible.
- Predictable Income:
It helps in financial management by offering a trustworthy & regular source of income.
- Immediate Income:
It provides an instant source of income, which is most of the time within a month.
- Customizable Durations:
It offers a flexible policy tenure which starts with 5 years.
- Retirement Security:
When you are assured about your retirement income, it provides you with mental peace & a sense of security.
- Customised Options:
It offers many different options, such as single-life & joint-life, allowing you to customise the plan according to your requirements.
Disadvantages of an Immediate Annuity Plan
Provided are the disadvantages of an Immediate Annuity Plan:
- Locked Investment:
As the investment amount is fixed & cannot be changed, it limits customisation if any change is required in future.
- Potential Fee Impact:
The fees, charges or commission amount reduces the amount of monthly income, which lowers the total return amount.
- Interest Rate Dependency:
Also, the payout amounts are affected due to the prevailing interest tariffs.
Reasons to Choose Fixed Deposits
One should opt for fixed deposits if:
- You are looking for less risk & financial protection.
- You are looking for consistent growth & guaranteed returns.
- You are comfortable with both short-term & long-term plans.
- You want to get easy access to your funds.
Reasons to Choose an Immediate Annuity Plan
One should opt for an immediate annuity plan if:
- You want to receive a continuous source of income to meet your present standard of living.
- You want to be financially secure & want stable & assured returns, irrespective of the market fluctuations.
Conclusion
Both plans play vital roles in retirement planning, but they serve different needs. While choosing between a fixed deposit & an immediate annuity plan, one should consider their financial objectives, risk acceptance level, need for guaranteed income, continuous flow of income, etc, to meet the requirements. Where a fixed deposit caters for security, premature withdrawal, & flexibility, on the other hand &, an immediate annuity plan offers guaranteed income.