Annuities and post-retirement income
In this chapter: Immediate vs deferred annuities · Comparing yield against alternative withdrawal strategies
Annuities convert lump sum to lifetime income. Types: Immediate (income from day 1), Deferred (income later), Joint Life (covers spouse), With-or-without-return-of-purchase-price. Indian annuity yields: 5.5-7% per year typically. Mandatory for 40% of NPS Tier I corpus.
Annuity types and yields (illustrative): Life with no return of purchase price (highest income, ~9-10% yield, heir gets nothing); Life with return of purchase price (moderate yield ~6-7%, heir gets corpus on death); Joint life (covers both spouses, lower yield ~5.5-6%); Increasing annuity (inflation-protected, lowest starting yield). Most NPS subscribers choose "Life with return of purchase price" — balance between income and bequest. Alternative: SWP from a balanced portfolio. ₹1 crore corpus with 7% expected return supports ₹4-5L/year sustainable withdrawal — comparable to 6.5% annuity but with bequest value preserved.
A practitioner insight: optimal split is partial annuitisation. Annuitise enough to cover essential expenses (food, healthcare, utilities — say ₹3L/year); use SWP for discretionary spending. This locks in floor income (no sequence risk) but preserves growth capital. Indian retirees historically over-annuitise (often 100% via mandated NPS); RIAs should re-balance. Also: annuity rates rise with age — buy at 65 instead of 60 for ~10% higher yields. Worth waiting if other income is available.