With multiple investment options available in India, choosing an appropriate plan must be difficult. Where on one hand annuity plans offer a steady flow of income post retirement, fixed deposits on the other hand offer assured returns to meet both short & long term objectives. Understanding the differences between the two investment plans will help you choose a plan that best suits your financial objectives.
What is Annuity?
An annuity plan is offered by the insurance companies, where an annuitant is required to pay either regularly or in a lump sum in exchange for a steady flow of income, either on an immediate or deferred basis. As they offer a guaranteed income post retirement, hence considered to be ideal for retirement planning. These plans offer a regular income post-retirement. There are two types of Annuity Plans in India: immediate or deferred. Under an immediate annuity plan, payment towards the premium is made in a lump sum, & income starts on an immediate basis. On the other hand, under a deferred annuity plan, the payment towards the premium amount is made regularly, & income is received after a certain period, i.e. post-retirement.
Benefits of Annuity Plans
Let us now understand the benefits of annuity plans:
- An annuity plan offers an assured stream of income fulfilling the financial requirements of the retirees. These plans offer financial stability to them without worrying about the savings getting exhausted.
- These plans come with the benefits of tax deferment, which means taxes are deferred till the time withdrawals are made. This helps your funds grow faster in comparison to taxable investment plans.
- This plan allows you to customise your plan as per your financial requirements, objectives, risk tolerance level, & investment horizon.
- Some of the annuity plans offer lifetime income, ensuring financial support throughout the life, eliminating the risk of savings getting exhausted.
- Some of the annuity plans offer death benefits, which offer financial support to the family members in your absence.
- These plans also provide coverage from creditors under certain circumstances, saving your funds from unexpected problems, such as loss of job, financial losses, medical emergencies, or accidents etc.
- This plan offers multiple pay-out options, providing you with flexibility.
What is a Fixed Deposit?
A fixed deposit plan is considered to be a savings-cum-investment plan which is offered by financial institutions & banks. These plans are best suited for risk-averse investors, providing a guaranteed source of returns, which includes the principal amount together with interest.
Benefits of Fixed Deposits (FDs)
Provided are the features & benefits of the Fixed Deposits:
- Fixed deposits offer guaranteed returns with high rates in comparison to a savings account.
- Tax savings pay-outs 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 investment goals.
Difference between an Annuity Plan & a Fixed Deposit
Once you have understood the meaning of what is annuity plan & fixed deposits, let us understand the differences between the two:
| Basis of Difference | Annuity Plan | Fixed Deposit |
| Objective | It fulfils the need for a steady flow of income during the course of retirement, either immediate or a deferred basis. | It is a secure investment plan with an objective of wealth creation & accumulation over a fixed period of time. |
| Returns | This plan offers fixed returns, where some of the annuity plans also offer an assured income post retirement. | Here, returns are dependent on the interest rates, where they are assured, predictable & guaranteed at the time of maturity. |
| Liquidity | They are not liquid investments as the purchase price gets locked. | They are better in terms of liquidity when compared with annuity plans, as they allow premature withdrawal of funds, but also attract a penalty. |
| Pay-out Structure | It includes periodic payments, i.e. monthly, quarterly, or annually, which depend on the type of plan selected. | Here, the interest is paid at a regular span of time or at the time of maturity, depending on the investor’s choice. |
| Taxation | The income under this plan is taxable according to the income tax slab of the annuitant, whenever they start receiving payouts. | Here, a tax is deducted at source, i.e. TDS on the amount of interest received on FDs. It is deducted when the interest income exceeds INR 40,000 in a financial year, & INR 50,000 in the case of senior citizens. |
Which Suits You Best – Annuity Plan or Fixed Deposit?
The choice of investment depends on your risk tolerance level, financial objectives, investment horizon, & liquidity requirements.
An Annuity Plan best suits if:
- You are near your retirement & require an assured income stream post your retirement.
- You are looking for steady & periodic payouts instead of a lump sum at the time of maturity.
- You are a risk-averse investor & want an income plan for your lifetime which will cover all necessities.
- You do not require any lump sum investment after the annuity plan gets started.
Fixed Deposits best suit an investor if:
- You are a risk-averse investor who is looking for an investment which helps to save over a definite period.
- You want a flexible investment period.
- You want to get a lump sum amount of funds at the time of maturity, along with the interest payouts on a regular basis.
- You are looking for liquidity in your investments, choose fixed deposits to avail the premature facility option.
Conclusion
Both the annuity plans & fixed deposits are considered to be secured investment plans, hence are best suited for risk-averse individuals. The decision of choosing a plan between the two depends on the financial objectives, risk tolerance level, & investment horizon. Annuity plans are considered to be best suited for those who are near retirement, while fixed deposits, on the other hand, best suit those who want secure & flexible investments.
