An annuity is a contract with a life insurance company. You hand over a lump sum, called the purchase price, and in exchange the insurer pays you a fixed income at regular intervals, most commonly monthly, usually for the rest of your life.
It is the one retirement product that solves longevity risk, which is the risk of outliving your money. Every other retirement approach requires you to guess how long you will live. An annuity moves that guess onto the insurer's balance sheet.
That protection is real, and it is also the reason annuities feel expensive: you are buying insurance, not chasing a return.
The main variants sold in India
Immediate annuity starts paying shortly after purchase. This is what almost every Indian retiree buys.
Deferred annuity takes the money now and begins paying at a chosen future date, accumulating in the meantime.
Life annuity without return of purchase price pays the highest income, and the capital is gone when you die. Nothing passes to your heirs.
Life annuity with return of purchase price pays a noticeably lower income, but the original lump sum is returned to your nominee on death. This is the most popular option in India for exactly that reason.
Joint life annuity continues paying the surviving spouse, at the same or a reduced rate, and therefore starts lower than a single life annuity.
Annuity with a guaranteed period pays for a minimum number of years even if the annuitant dies earlier.
Each additional protection lowers the monthly income. There is no free option in that list.
Where an annuity is compulsory: NPS
For most people the first real encounter with an annuity is the NPS exit rule. On exiting NPS at the normal retirement age, at least 40% of the accumulated corpus must be used to buy an annuity from an empanelled insurer, and up to 60% can be withdrawn as a lump sum, which is tax-exempt. Smaller corpuses below a threshold can be withdrawn in full, and different rules apply on early exit and on death.
Because this is compulsory rather than optional, it is worth understanding the pricing before you reach 60 rather than after.
A worked example
Suppose you retire at 60 with an NPS corpus of Rs 50,00,000.
You withdraw 60%, which is Rs 30,00,000, as a tax-free lump sum. The remaining Rs 20,00,000 must buy an annuity.
Annuity rates quoted by Indian insurers have commonly sat somewhere in the region of 5.5% to 7% depending on the option chosen, the age at purchase and the insurer, so treat the following as an illustration and get live quotes rather than relying on any figure here.
At an illustrative 6% on a life annuity without return of purchase price, Rs 20,00,000 produces about Rs 1,20,000 a year, roughly Rs 10,000 a month before tax, for life, with nothing left for heirs.
Choosing return of purchase price instead might drop the rate to around 5%, giving roughly Rs 8,300 a month, but the Rs 20,00,000 goes to your nominee on death.
The annuity income is fully taxable at your slab rate, which is the detail most people miss when comparing it with other options.
How it compares with a systematic withdrawal plan
| Feature | Annuity | SWP from mutual funds |
|---|---|---|
| Income certainty | Guaranteed for life | Depends on markets and withdrawal rate |
| Longevity risk | Carried by the insurer | Carried by you |
| Capital access | Locked, cannot be withdrawn | Fully accessible at any time |
| Growth on remaining capital | None to you | Continues to be invested |
| Legacy to heirs | Only with return of purchase price | Whatever remains |
| Taxation | Income taxed at slab rate | Only the gain portion, under capital gains rules |
| Flexibility to change | Effectively none | Change or stop the withdrawal anytime |
A systematic withdrawal plan usually produces a better outcome on paper and leaves the capital accessible. An annuity produces certainty. Many retirees reasonably use both: an annuity sized to cover non-negotiable monthly costs such as food, utilities and medicines, and an SWP for everything above that. Model the SWP side with the SWP calculator and the corpus itself with the retirement calculator.
Before you buy one
Get quotes from several empanelled insurers on the same date for the same option, because rates differ meaningfully between them and the choice is effectively irreversible. Compare like with like: a higher headline rate is often a life annuity without return of purchase price sitting next to a with-return quote.
And be clear about what the product does not do. A fixed annuity income does not rise with inflation. At 6% inflation, Rs 10,000 a month buys roughly half as much in twelve years. That is the strongest argument for not annuitising more of the corpus than the compulsory portion, and for keeping the rest invested. This is general information and not personalised advice.