Pros and Cons of Annuities

One of the most evident pros of annuity is that it provides lifelong guarantee in the form of regular payments till you live. It is helpful if you are worried you did not save enough for your retirement years in time. It serves as an additional income source, which can be immensely relieving when you no longer have a job.

A desired advantage of annuities is that you can retain your financial independence post-retirement. Keep in mind that the amount and frequency of annuity payments will depend on your contract terms

The distinct advantage of annuities is that they are structured to meet the demands of changing economic situations. For instance, as time passes, the inflation rate increases the cost of living.

Similarly, the rising healthcare costs are a concern at an older age since you are more at risk of developing medical issues. The number of the elderly population in India is expected to reach 58.7 million[1] in 2025. These factors can have an adverse impact on their financial plans for retirement.

However, the sum assured accumulated over time can come in handy to tackle such financial situations and emergencies.

It is always an advantage to reduce your taxable income, if possible. Similar to most insurance products, reducing tax liabilities is also an advantage of annuities. You can avail of the tax benefits under the applicable section 80C and 10(10D) of the Income Tax Act, 1961.

When you compare annuities to other market-linked products, the pay-outs can seem relatively lower. You may find that if you had invested your money in assets that fluctuate in value, it would yield better returns.

Note that this may not be a disadvantage of annuity for many. Some people regard it as a safer choice that secures an income source. The lower returns come with the guarantee of regular fixed pay-outs.

Another disadvantage of annuities is that it does not allow partial or premature withdrawal of money. Since the primary feature of an annuity is to create a retirement income for you, the withdrawals can be unproductive, making it one of the cons of annuity.

There may be some plans that allow partial or premature withdrawals, but they come with strict regulations. Mostly, lack of liquidity is one of the main cons of annuities.

Your retirement plans depend on several personal factors that are distinctive. Whether you will have financial dependents, enough savings, or other expenses, these are important things to consider. Knowing the pros and cons of annuities helps in reviewing their suitability for your investment portfolio.

If you are looking for a guaranteed income source, it may be an ideal investment tool for you. But, remember that you will not have access to your money at your convenience. In general, it is advisable not to invest all your assets into an annuity.

It is wiser to keep a portion of your assets to yourself and meet additional expenses on your own. It is better to have multiple layers of financial security for emergencies. Contemplate the several pros and cons of annuities and how they affect you, in particular.

What seems to be an advantage of annuities to one may not be the same for another. Therefore, map your requirements carefully and weigh them with the pros and cons of annuities to make the right decision.