Annuities: the opposite risk from term insurance

The basic shape

Immediate vs deferred

An immediate annuity starts paying income almost right away (commonly within a month of purchase) in exchange for a lump sum today — this is what a Saral Pension-type plan does, and it's also how NPS corpus commonly gets annuitised at retirement. A deferred annuity lets the corpus grow for a chosen number of years before income starts, either through a single lump sum left to accumulate or through years of contributions, and generally results in a higher eventual income for the same money in, precisely because it's been earning for longer before payout begins.

Payout structures

Structure	What it means
Life annuity	Pays as long as the annuitant is alive; stops entirely on death, with nothing further paid to anyone (in the simplest version).
Joint-life annuity	Continues to a second person (typically a spouse) after the primary annuitant dies, usually at the same or a reduced rate.
Return of purchase price (RoP)	On the annuitant's death, the original purchase price is returned to the nominee — at the cost of a lower income during the annuitant's lifetime compared to a plan with no RoP.
Increasing annuity	Income rises by a fixed percentage each year, to offset inflation — starts lower than a level annuity for the same premium.

Pension ULIP and deferred accumulation

Some retirement products are unit-linked during the accumulation phase — you build a corpus in market-linked funds over your working years, then convert ("vest") that corpus into an annuity at retirement, either with the same insurer or, in many cases, by shopping the open market for the best available annuity rate at that time.

Why does this exist?

Because a retiree managing their own withdrawals faces a risk no spreadsheet fully solves: not knowing their own lifespan. A self-managed drawdown plan can run dry at 84 for someone who lives to 95. An annuity provider pools thousands of retirees together — some die at 70, some live to 100 — and the pool's averages let it keep paying every survivor for as long as they live, funded partly by the premiums of annuitants who didn't live as long. That pooling is the entire mathematical trick, and it's the one thing a personal investment portfolio structurally cannot replicate on its own.

What to weigh before buying

• Once annuitised, most of the purchase price is not liquid or inheritable in full — check whether an RoP option matters to you before committing.
• A level annuity's real value erodes with inflation over 20-30 years; weigh an increasing-income option if that matters to you.
• Rates are generally locked in at purchase — shop the rate at the time you actually buy, since it depends on prevailing conditions then.
• Tax treatment of annuity income depends on the specific structure and current law — see our taxation page.