Annuities and Retirement Products
Domain 4 tests annuities and retirement income: the difference between accumulation and payout, the main annuity types, and how mortality pooling works.
Core concepts
An annuity converts a lump sum into periodic income. The annuitant receives the income; the policyholder may be a different person. In the accumulation phase premiums build a fund; in the distribution phase the fund is converted into income, often at the vesting age.
Main types
- Immediate annuity: income starts at once after a single premium.
- Deferred annuity: income starts after a chosen date.
- Life annuity: income for life; it stops at death.
- Annuity certain: income for a fixed number of years, payable to the nominee if the annuitant dies.
- Joint life and last survivor: continues until the second death.
Worked example
Meera retires with ₹20 lakh. A life annuity pays the highest income but leaves nothing to heirs if she dies early. An annuity certain for 15 years pays less but protects her nominee. If she lives well beyond 15 years, the life annuity wins on total income. The choice turns on longevity risk versus bequest.
Traps
Treating an annuity as life insurance; assuming annuity certain pays for life; ignoring inflation and the loss of capital; forgetting that a deferred annuity has no income before vesting.