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Smartest investment and life plans in UAE
Don't you agree that the only thing constant about life is change? Be it the circumstances, behaviour, preferences, situations, requirements, and how can we forget our mood swings? Something or other will always keep changing in your life. Isn't it? And of course, dealing with constant change can be a handful, especially if you just go ahead and wing it in every new situation. Nevertheless, instead of surrendering to the panic during any bolt from the blue situation, what if you can be smart? Having said that, the smartest thing to do here is always be prepared for all unanticipated situations. But, how can you do that? This is where annuity plans come into the picture. So, Annuity plans are a kind of investment plan which aim to help you build a retirement corpus. Undoubtedly, Annuity plans are a great way to make sure that your financial future will be well-protected when you finally retire. Below is everything you need to know about Annuity plans!
Annuity plans are a type of investment plan offered by most insurance companies. Expanding further, you invest a certain sum of money with the insurance company by buying the annuity plan. In return, the insurance company offers you a certain rate of return on your investment. Additionally, the insurance company reinvests the money you spend to buy the annuity plan into other investment ventures to get returns. Annuitants, i.e., you, generally have the freedom to choose the investment venture from the available ones in the company portfolio. Also, note that Annuity plans can be of different types depending on the timeline of returns, level of returns, payout and level of risk they bring in.
The working structure of annuity plans is quite simple, actually. In brief, you choose a plan that you want to buy, invest your funds and then wait for the returns. But, we have entailed a comprehensive list of the various steps involved in the working structure of annuity plans:
This kind of annunisation payout refers to a life-long stream of income. As the name suggests, this annuity pays out for as long as you stay alive. However, the payment stops after the death of the annuitant. Also, note that the dependents do not get any compensation or return on the principal amount.
This particular payout option allows you to choose the amount of payment you would like to receive every month. So, you can also choose the number of payments you want over the years. However, you may outlive your payout if you choose systematic withdrawal payout options.
As the name suggests, this annunisation option provides you with a lump sum payment whenever you want after the lock-in period. However, lump-sum payouts are not recommended for annuity plans. Even though investment gains in the UAE are not taxed, apart from retail investment, withdrawing a lump sum amount is still not a good choice. Only consider it when you need the money for emergency funds or to fulfil an obligation.
Guaranteed period payable annuity plans keep paying until the end of the said period. This means even if the annuitant dies within this period, the plan keeps paying off the dependents. However, the annuitants also have the risk of outliving the annuity payments.
This type of payout ensures that you get paid a certain amount every month for as long as you live. Additionally, after your death, your dependents get the principal amount you invested. This kind of payout takes care of you and your family in your absence.
This payout option allows you to keep both you and your spouse under the protection of the annuity plan. When the annuitant meets their demise, the spouse keeps getting the annuity payments. Payments are a bit lower here as compared to the generic life income annuity option since the life expectancy of both partners is taken under consideration.
Retirement plans and annuity plans are pretty similar in many ways. They both require you to invest, either lump sum or periodically and then offer a payout at maturity. However, there is one key difference between annuity and pension plans. For example, where retirement plans start paying out after you retire, annuity plans can start paying out whenever you like. Moreover, you can set your payout timeline as per your requirement, whether it is 5 years or 15. On the flip side, a pension scheme is a corpus fund to which both employees and employers contribute. It is available for all employed UAE nationals. Also, note that both private and public sector employees are eligible to get a pension after completing 20 years of service and 50 years of age.
Annuities, pension and retirement plans are often confused as the same thing. While they all give you a chance to build a retirement corpus, differences still exist. Below is a table of comparisons for annuity and retirement plans to help you understand them better:
|Parameters||Annuity Plans||Retirement Plans||Pension Scheme|
|Meaning||Annuity plans are an insurance company's product that allows you to safely invest money, grow it, and get regular payouts. Annuity plans are a type of investment plan in the UAE.||Retirement plans are another product from the insurance company that helps you build a retirement corpus. Payouts are given once you retire.||A pension scheme, aka social insurance, is offered to UAE citizens by the government. Employees, employers and the government make monthly contributions to building a corpus that pays the employees when their employment ends.|
|Eligibility||Any UAE national and resident older than 30 years and younger than 100 years.||Any UAE national or resident.||UAE nationals only older than 18 years.
The employee must have completed at least 20 years of service and should be at least 50 years old to get a pension.
|Investment||Investment here can be made in a lump sum or as monthly premiums.||Mostly a monthly-premium set-up but can also be a lump sum.||A monthly contribution of 5% from the employees.|
|Payout Timeline||Annuity plans can payout anytime without restrictions. You can choose your payout timeline yourself. However, the lock-in period has to be completed, if applicable.||Retirement plans only start paying out after you retire. Getting early returns is not possible here.||The pension scheme fund starts paying out after retirement only.|
|Payout Style||Annuity plans come with several kinds of payout, including lump sum, period, joint, life annuity, guaranteed, return on principal, etc.||Most retirement plans offer monthly income payouts. Some may offer a lump-sum payout as well.||Monthly payouts in salary format.|
|Offering Party||Insurance companies offer annuity plans.||Insurance companies offer retirement plans.||Government and the employers offer pension schemes.|
|Transferability||Annuity plan payouts can be transferred to spouse/dependent.||Retirement plan payouts can be transferred to the spouse.||Pension scheme payout can be transferred to the spouse.|
Safeguards Capital: Annuity plans are one of the best ways to safeguard your wealth and earn a little something along with it. And who doesn't like returns? With payout options like return on purchase, you can rest assured that your initial investment amount will be returned in full even if the investment does not make any profit. In a word, your savings and wealth will stay protected, to say the least.
Lifetime Payouts: Annuity plans promise lifetime payout for the annuitant and their dependents. Several annuity payout options promise a steady flow of income to your dependents after your death, like the joint-life annuity payout or life-income annuity payout with a return on purchase clause. You just need to be smart when choosing your payout option initially.
The Flexibility of Investment Options: The money you use to buy annuity plans is referred to as your investment. This money is then used by the insurance company to invest in further ventures like equity shares and mutual funds. You, as the annuitant, have the complete freedom of deciding where and how your money is invested further. You can choose the investment ventures from the insurance company's portfolio.
No Mandatory Withdrawal Period: Since annuity plans are not retirement plans, you do not necessarily have to start receiving payout once you get retired. You can choose to keep the annuity payouts as investments for as long as you like. Basically, you can arrange for a payout as and when you like.
Death Benefits: Annuity plans do not offer compensation in the name of the death benefit. However, your dependents can still get financial support after your demise if you arrange for it when buying the plan. Life income annuity with return of money payout, joint life payout and guaranteed period payouts – all three payout options for annuity plans ensure that your dependents will either receive the returns or the principal amount of the annuity plan.
No Cap on Investment Money: Annuity plans do not put a limitation on the level of investment you can put into the plan. Moreover, you can choose to provide any level of investment regardless of your income level. This makes annuity plans more flexible than any other kind of investment plan.
Since there are many kinds of annuity plans, you may get a little confused about the kind of plan that would suit you the best. Given below are each type of annuity plan and who should buy them:
Young investors who still have more than 10-15 years before retiring or/and people who can afford to lock in their investment for a longer duration should buy deferred annuity plans.
People who are approaching retirement and need an immediate source of income should go for immediate annuity plans. In this type of plan, you make a lump sum investment, and they immediately start paying you a small monthly sum.
A lump-sum annuity plan is suitable for people who have a surprise obligation to fill or want to keep the money aside as emergency funds.
These plans are best suited for people who can afford to take risks with their investments. You can invest the money in a variable annuity in several investment options with varying risk and return rates. It is not very suitable for people who are about to retire or people who are looking for stable return options.
If you have dependents, periodic annuity plans can be a good choice for you. These plans pay the normal scheduled amounts like annuity plans. In addition to that, you also get periodic payments at the end of the 5th, 10th and 15th years.
These plans are ideal for people who want a steadily fixed sum of income for a long time. It is a preserved choice for people who are not ready to take high risks.
Annuity calculators assess the payout of an annuity plan concerning the accumulation period. In the annuity calculator, you simply provide information like how long you want to get payouts, when should the payouts start, place of residence, intervals between the income, the principal amount you want to invest, etc. In addition, annuity calculators can be used to get an estimate of the payouts you will get as per your investment capacity, choice of annuity, choice of payout and period of the investment and more. Also, note that annuity calculators are not exactly accurate to the mark, and you only get an estimate, although quite accurate.
The annuity formula used by most annuity calculators is as follows:
PV = PMT * [1 – [ (1 / 1+r)^n] / r]
PV = Present value of the ordinary annuity
PMT = Present value of each payment
r = Interest rate
n = Number of periods
Depending on the type of annuity calculator you are using, you can calculate things like average annuity rates and the principal amount you need to invest to get desired returns in a certain period as per your principal and growth rate, etc.
Ans: Yes, most insurance companies establish age limits on the annuitants. The minimum age applicable in most cases is 30 years, and the maximum age is 100 years.
Ans: The withdrawal allowances depend on the type of annuity plan you have chosen and your insurance company's policies. Moreover, Most annuity plans lock up your investment for a pre-decided period. Early withdrawals are allowed in exceptional circumstances only. For example, early withdrawals are permitted if the annuitant is diagnosed with a critical illness.
Ans: Annuity plans are not life insurance plans; hence they do not offer a death benefit. However, return on purchase annuity plans returns the principal sum to the dependents if the annuitant meets their demise.
Ans: Yes, senior citizens can also benefit from buying annuity plans. The best option for senior citizens requiring an immediate flow of income is immediate annuity plans. These plans start paying out immediately after you invest.
Ans: This completely depends on the type of annuity you have bought. Life income annuity expires after the annuitant dies. However, a joint-life annuity keeps paying your spouse after your death. In the case of return on purchase annuity plans, the principal investment money is returned to the dependents after the annuitant's death.
Ans: Yes, you can easily choose to receive a monthly payout from your annuity plan. Choose the annunisation payout option when you buy your plan in the beginning.
Ans: Annuity plans offer benefits when you retire; however, they are much different from retirement plans. Retirement plan corpus can only be utilized when you retire. However, annuity plan payout can be scheduled as and when you need it. The scheduling has to be done when you buy the plan in the beginning.
Ans: To find the best annuities for yourself, you need to define your investment and life goals clearly. For example, if you have dependents, a life income annuity with a return on investment is a good choice. But, In essence, the best annuities for you will depend upon your future requirements.
Ans: Financial experts recommend that your 30s and 40s are the best time to invest in annuity plans. Since 30 years is the minimum age to buy annuity plans, it makes sense to buy them before you hit 50.
Ans: Deferred annuity plans offer the highest returns since your investment is locked for a certain period here. However, the flexibility for withdrawals is limited here.
Ans: People who are very close to their retirement may consider buying immediate annuity plans. Since they would require an immediate source of income after retirement, it is wise to invest in an immediate annuity rather than deferred, which would lock your investment for a significant time.