Investment plans help investors to achieve a steady flow of income, ensuring a financially secure & peaceful retirement tenure. Two most renowned retirement plans that allow retirees to manage their cost of living, medical costs, manage routine expenses, & ensure a comfortable retirement period available in India are the Systematic Withdrawal Plan (SWP) & an annuity plan.
What is Annuity?
An Annuity Plan is a financial product issued by insurance companies that provides a regular stream of income to the investors, mainly post-retirement. This plan involves making payments to the insurance company on a monthly, quarterly, or annual basis against a regular stream of income.
Features of an Annuity Plan
Provided are the features of an annuity plan:
- Guaranteed Income
Under an annuity plan, investor will receive a regular & assured stream of income throughout their lives or for a definite period.
- Inflation Protection
Some of the annuity plans also help keep pace with inflation, allowing investors to maintain their purchasing power.
- Simplicity
These plans are simple to manage because the payouts are handled by the insurance companies themselves.
- Lower Potential for Growth
These plans have lower potential for growth in comparison to direct market investment.
- Inflexibility
This plan does not allow an investor to change the terms & conditions or access the lump sum amount without any penalty.
- Cost
It involves different applicable charges, hence reducing the value of the investment.
What is SWP?
A Systematic withdrawal Plan (SWP) is offered by a mutual fund company, which allows investors to withdraw funds from the corpus accumulated at a regular period of time. The leftover investments remain invested, allowing investors to earn returns, hence providing growth potential. This plan offers flexibility in terms of withdrawal amount & frequency, depending on the market fluctuations & financial needs.
Features of SWP
Provided are the features of an SWP:
- Flexibility
Under this plan, investors are allowed to customise the amount & frequency of withdrawals to fulfil their financial requirements.
- Market participation
As this plan works on mutual fund investments, which are market-linked, if they perform well, it increases the growth potential.
- Customisation
It allows investors to customise the plan according to their financial needs, hence allowing them to make adjustments.
- Tax efficiency
Under this plan, investors can plan their withdrawals to make efficient tax planning, hence reducing the burden thereof.
- Market risk
As mutual funds are market-linked, it leaves an impact of the associated risks, in terms of the amount left for withdrawal purposes.
- Management
It involves an active management of funds along with a fair understanding of market fluctuations to streamline withdrawals.
Difference between SWP & Annuity Plan
Once you have understood the meaning what is annuity & SWP, it is now time to understand the differences between the two.
| Point of Difference | SWP | Annuity Plan |
| Income source | With the help of a withdrawal amount | In the form of interest or dividend |
| Principal Amount | It gets reduced over a period of time | It remains intact. |
| Monthly Income Potential | It is on the higher side for a fixed period | It remains lower because of a stable corpus amount. |
| Flexibility | It provides flexibility to change the amount & policy tenure. | It is rigid. |
| Risk Choices | It is structured, which includes hybrid allocation. | It offers low risk. |
| Taxation | The capital gains tax is calculated on the amount of gains. | Interest or dividend is taxed at the applicable income tax slab rate. |
| Legacy | The corpus amount gets reduced, hence requiring planning. | It is easy, & the corpus remains as is. |
How to Choose between Annuity & SWP?
An investor should consider certain factors, such as financial objectives, risk tolerance level, & investment horizon, while deciding between the two plans, namely annuity & SWP. For some individuals, growth may be a priority, & they will look for SWP & for others, an assured income would be, hence opting for an annuity. Let us discuss the key considerations that an investor may look for while choosing a plan that best aligns with their objectives.
- Financial Objectives
- Investors seeking growth in the retirement funds may opt for SWPs.
- Investors looking for assured returns may opt for annuity plans.
- Risk Tolerance Level
- Investors who are willing to accept market risks may opt for SWPs.
- Investors who are not willing to accept market risks may opt for annuities.
- Income Needs
- Investors looking for an increase in income over a period of time should opt for SWPs.
- Investors looking for a consistent & regular stream of income should opt for an annuity.
- Retirement Period
- Retirees are looking for a long retirement tenure to get flexibility in accessing funds should opt for SWPs.
- An annuity plan suits those individuals who don’t want their funds to outlive them, hence offering mental peace.
- Estate Planning
- Under SWP, the remaining balance of investment is allowed to be transferred to the heirs of the investors.
- Under an Annuity Plan, investors are not offered death benefits.
- Inflation
- Under an annuity plan, the payments also increase with inflation, further increasing the purchasing power.
- If the amount is invested in high-performing funds, it may increase the real value, hence beating inflation.
- Health Factor
- Investors having health issues should opt for SWPs, letting you leave an estate behind.
- Investors with good health may opt for annuity plans.
- Liquidity
- Investors seeking access to funds in emergencies should opt for SWPs.
- This is because annuity plans are considered to be less liquid, as funds get locked under this plan.
Common Myths: SWP & Annuity Plan
The common myths associated with SWPs & annuity plans are:
Myth 1: SWP provides a guaranteed income
SWP does not offer an assured income; rather, mutual funds are required to be redeemed to make withdrawals.
Myth 2: SWP withdrawals are tax-free
The capital gains on the units redeemed are taxed, & not SWPs.
Myth 3: Annuities offer tax-free income
The payouts on annuity are taken as income & taxed according to the investor’s income tax slab.
Myth 4: SWP & annuities serve the same purpose
Both plans have common objectives, providing cash flow. SWPs are flexible & market-linked, whereas annuities are formal, long-term plans with limited liquidity.
Conclusion
One should understand the difference between the two plans, namely annuity plans & SWPs, to make an informed decision. Where annuities, on one hand, are opted for depending on the individual choices & can be customised according to the financial position. A SWP, on the other hand, offers potential for growth with flexibility.
