Planning for retirement is more than just saving money—it’s about ensuring that you will not outlive your savings. One of the most reliable ways to secure a steady income post-retirement is through an annuity plan. Understanding the pension annuity definition, its features, and how it works is crucial for retirees and working professionals alike. Annuities can provide guaranteed income, remove uncertainty around market fluctuations, and help manage longevity risk. However, they are long-term commitments, so it is important to weigh the pros, cons, and tax rules before locking in.
👉 To understand broader retirement income tools, you may also read: What is an Annuity in a Retirement Plan? – How it Works.
A pension annuity is a contract between you and an insurance company or pension provider. In exchange for a lump sum or a series of contributions, the insurer promises to pay you a guaranteed income for a specific period—often for life.
Key features of annuities include:
Unlike other retirement savings products that fluctuate with the market, annuities provide financial certainty—though at the cost of liquidity.
An annuity functions in two distinct phases:
Your payout depends on factors such as purchase amount, type of annuity chosen, prevailing interest rates, your age, and whether additional features (like joint life or ROP) are selected.
👉 For more details, see Deferred Annuity: Meaning, Benefits & How It Works.
Annuities come in multiple forms, each designed for different retirement needs:
👉 Learn more in our guide: Understanding the Types of Annuities.
While often used interchangeably, there are distinctions:
Think of a pension plan as the “building phase” and the annuity as the “spending phase.”
Choosing the right annuity depends on individual circumstances. Consider:
Annuity taxation is one of the most important aspects to understand:
A pension annuity can serve as a cornerstone of retirement security by ensuring lifelong income. However, not all annuities are alike—consider liquidity, payout design, inflation, and taxes before committing. Review your retirement needs, consult a financial advisor, and compare plans carefully before purchase.
PNB MetLife offers retirement plans that can complement annuities. Here are three options to explore:
These are not annuities but complement retirement planning by providing a lump-sum death benefit to protect your family financially in case of unforeseen events, such as the policyholder’s death.
A pension annuity is an insurance contract that converts a lump sum into guaranteed periodic income, typically for retirement years.
Pension plans accumulate savings, while annuities focus on providing regular payouts from those savings.
Yes, annuity payouts are taxed as Income from Other Sources under Section 56 of the Income Tax Act at your slab rate, whether purchased from an insurer or linked to employer-funded schemes like NPS or superannuation. Note: Regular employer pensions (non-annuitized) may be taxed as Salary.
Immediate annuities usually cannot be surrendered. Some deferred products allow limited withdrawals or surrender with penalties.
Fixed annuities do not. Some products offer escalating payouts (e.g., 3–5% annually) to offset inflation.
Depending on the plan, either payouts stop, or the nominee receives the purchase price back (under ROP options).
It is guaranteed by the insurer. Reliability depends on the insurer’s financial strength.
Yes, many insurers allow NRIs to purchase annuities, though terms may vary.
Purchase amount, age, interest rates, annuity type (fixed, joint, escalating), and add-on features all affect payout.
Not necessarily. An annuity should be part of a balanced retirement strategy along with other investments for liquidity and growth.
It means the insurer pays back the invested amount to your nominee after death, but regular payouts are lower.
Variable annuities, as seen in some global markets, are not widely available in India. Some insurers offer unit-linked insurance plans (ULIPs) or NPS with annuity options that have market-linked components, but these carry investment risks and differ from traditional variable annuities.
Yes, it’s a passive stream of income, though still taxable like other income.
Most insurers let you choose monthly, quarterly, half-yearly, or annual payouts.
Deferred annuities can benefit younger investors, but liquidity constraints mean they are better suited as a retirement tool rather than a short-term investment.
Piyush Kataria, SEO Manager at PNB MetLife, is a seasoned digital marketing strategist with over a decade of experience in optimizing websites for search engines. His expertise extends to keyword research, content strategy, technical SEO, and link building, all of which have been instrumental in driving organic traffic growth at PNB MetLife. With a strong foundation in life insurance, Piyush leverages his industry knowledge to create targeted and effective SEO campaigns.
Sakshi Malhotra is a seasoned marketing professional associated with the Life Insurance industry since 2007. At PNB MetLife, she heads Digital Marketing and Direct to Customer line of business. She is responsible for driving effective customer engagement through the company’s website and social media channels. In addition, she drives customer online buying journeys to help them buy the right product.
Disclaimer:
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
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