What Is an Annuity?
An annuity is a financial product, usually from an insurer, that pays you a regular income — often for the rest of your life — in exchange for a lump sum you invest upfront. It is a common way to turn a retirement corpus into a dependable pension, removing the worry of outliving your savings.
Why an annuity matters
An annuity solves retirement’s hardest problem: making sure your money lasts as long as you do. By converting part of your corpus into guaranteed lifelong income, it removes the risk of running out of money in old age.
It is central to NPS, which requires you to use at least 40% of your corpus at 60 to buy an annuity — so understanding annuities helps you plan that decision well.
How an annuity works
You pay an insurer a lump sum, and in return they pay you a regular income — monthly, quarterly or yearly — either immediately (an immediate annuity) or starting later (a deferred annuity). The income can be for a fixed term or for your whole life, and options exist to continue payments to a spouse. The insurer takes on the longevity risk, which is the security you are paying for. The trade-off is that annuity returns are typically modest, so many retirees use an annuity for part of their corpus and keep the rest invested for growth.
A real Indian example of an annuity
At 60, Meena has a NPS corpus. She uses part of it to buy a life annuity from an insurer, which pays her a fixed monthly income for the rest of her life — a guaranteed pension she cannot outlive. She keeps the remaining corpus in a mix of investments for growth and liquidity. The annuity covers her essential expenses with certainty; the investments handle inflation and extras.
Benefits
Common mistakes
Best practices
Annuity vs keeping it invested
| Annuity | Stay invested | |
|---|---|---|
| Income | Guaranteed, often for life | Depends on returns/withdrawals |
| Longevity risk | Insurer bears it | You bear it |
| Returns | Typically modest | Potentially higher, variable |
| Flexibility | Low (locked in) | High |
Frequently asked questions about an annuity
How does an annuity work?
You give an insurer a lump sum, and they pay you a regular income — often for life. Payments can start immediately or later, and can be for a fixed term or for your lifetime, with options to protect a spouse.
What are the types of annuity?
Immediate annuities start paying at once; deferred annuities start later. They can pay for a fixed period or for life, and variants can return the purchase price to heirs or continue paying a spouse. Terms and rates vary by insurer.
Is an annuity a good investment?
An annuity is about security, not growth — it guarantees income you cannot outlive, but returns are typically modest. Many retirees use an annuity for essential expenses and keep the rest of their corpus invested for growth.
Is annuity income taxable?
Yes. The regular income you receive from an annuity is generally taxable as income in the year you receive it, at your slab rate. Check the current rules for your specific product.
Related terms
Try it with your own numbers
Related guides
How BudgetAnalyzer uses this
BudgetAnalyzer helps you track the retirement corpus that will one day fund an annuity, so you can see whether you are on course to buy the pension income you will need.
Ready to take control of your money?
Bring every expense, budget and account into one private dashboard — free to start.