Annuities: buying yourself an income for life
An annuity is the product that turns a lump sum into a guaranteed income for as long as you live. It solves a real and underrated worry, outliving your money, and it does so at a real cost. This guide is about what an annuity is, what it gives up, and where it fits, especially since the NPS now channels part of your retirement corpus into one.
What an annuity actually is
You hand an insurer a lump sum, and in return they pay you a fixed income, monthly or yearly, for the rest of your life (or for a chosen period). It is, in effect, a pension you buy. The insurer takes on the risk that you live a very long time, and you take on the certainty of the income in exchange for giving up the capital.
What it does for you
It removes longevity risk, the danger of running out of money in old age, by guaranteeing income no matter how long you live. For a retiree who wants a predictable floor under their spending, and who would worry about managing a large corpus through a long retirement, that certainty has real psychological and practical value.
What it can't do
- It can't give high returns. The guaranteed income usually reflects a low effective rate, the cost of the insurer taking on your longevity risk.
- It can't be undone. Once bought, the capital is generally gone, with little or no liquidity if your circumstances change.
- It often can't keep pace with inflation. A fixed income buys less each year unless you specifically pay more for an inflation-linked version.
What it costs, and who gets paid
The cost is the low effective return, which compensates the insurer for guaranteeing your income for an unknown lifespan. The agent or distributor who sells it earns a commission, and because annuities are often bought once with a large sum, that commission can be meaningful, which is part of why they are actively sold to retirees.
What you can, and can't, trust it for
- Trust it for
- A guaranteed income you cannot outlive, and a predictable floor under your retirement spending.
- Don't rely on it for
- Growth, access to your capital, or keeping up with inflation unless you pay extra for that feature. The certainty is bought with return and flexibility.
Where it fits
An annuity fits a retiree who values a guaranteed floor and peace of mind over returns and control, often for a portion of the corpus rather than all of it, leaving the rest invested for growth and access. It is also unavoidable in part, since the NPS currently requires a share of the corpus to be used to buy one at exit. The question is rarely all or nothing, but how much certainty you want to lock in.
What to check
- Confirm the insurer is registered with IRDAI, and compare the income offered across insurers, since rates differ.
- Work out the effective return on the income, not just the monthly figure, and decide whether the certainty is worth that rate.
- Check the options, return of capital to heirs, joint life with a spouse, inflation-linking, and what each one costs in lower income.
Source: IRDAI
An annuity buys certainty you cannot outlive, paid for with return and control.
For the worry of running out of money in old age, it is one of the few real answers. The cost is a low return and a capital you give up, so it tends to fit best for part of a retirement, not the whole of it, used deliberately rather than sold in bulk.
This guide describes how the product works. It isn't a recommendation to buy an annuity or to avoid one. It solves longevity risk at the cost of return and access, and whether that trade suits you depends on how much guaranteed income you want as a floor.