Annuities can be seen as life insurance in reverse. In life insurance you keep paying a small amount of money to a life insurance company, and when you die your nominee gets a lumpsum.

In annuity you pay a lumpsum from which the company pays you a fixed amount of money (or indexed) on a regular basis TILL YOU DIE. This is the insurance that you take against living too long. Exactly opposite of life insurance.

Normally both these instruments are sold by the same company and the cash flow management becomes easy.

Should you buy an annuity? Should you buy an immediate annuity or a deferred annuity?

The difference between an immediate annuity and a deferred income annuity is that immediate annuities begin payouts in less than one year, while deferred income annuity payouts can be deferred – for a few or for many years.

I can purchase a Rs. 50,00,000 single premium immediate annuity today and begin receiving payouts next month if I wish. I can purchase a Rs. 100,000 single premium deferred annuity today and elect to not receive those payouts for ten years, for example, if I prefer.

Why would I want to defer an annuity’s payouts? Because deferred annuities and immediate annuities solve two different retirement problems.

Immediate annuities can be purchased at the beginning of retirement to help provide a lifetime of safe “floor” income. Retirees with little secure income may want to augment that safe income with an immediate annuity. Retirees with significant current income benefits but no pension may have plenty of safe income and may not need an immediate annuity.

Also you could buy an annuity at various ages – say Rs. 30L at age 62, Rs. 30L at age 71 and Rs. 30L at age 75. This 90L staggered buying could give a good pension till you reach the age of 95 and will work as an indexing impact also…