Annuity Plans vs. SIP + SWP

In India, retirement planning and ensuring a stable, post-retirement income are critical aspects of financial planning. For many, the option of an Annuity Plan is often considered the go-to solution, offering fixed returns and a reliable income stream. But is it truly the best choice for you?
What if you could create your own income stream, with greater flexibility, potentially higher returns, and complete control over your investments? By combining Systematic Investment Plans (SIPs) and Systematic Withdrawal Plans (SWPs), you can build a flexible, customizable financial strategy that may offer more benefits than traditional annuities.

Let’s delve deeper into the details.

What Are Annuity Plans?

An Annuity Plan is a financial product that guarantees a regular income stream, usually for life or a specified period. You make a lump sum investment with the insurance company, and in return, they provide you with periodic payments, typically on a monthly basis.

Types of Annuity Plans:

1. Immediate Annuity: You pay a lump sum amount, and the insurer immediately starts paying you a fixed monthly income. This is usually suited for those nearing retirement.

2. Deferred Annuity: You make an investment now, but the income starts after a deferral period (e.g., 5 or 10 years). This is suited for younger investors looking for a future income stream.
   
   

Famous Annuity Plans in India:

• HDFC Life Immediate Annuity Plan

• LIC Jeevan Akshay-VI

• ICICI Prudential Immediate Annuity Plan

• SBI Life Annuity Plan

• Tata AIA Life Immediate Annuity Plan

These plans offer various options such as:

• Life Annuity: Payments are made for the lifetime of the policyholder.

• Joint Life Annuity: Payments are made as long as either of the two lives (usually the policyholder and their spouse) is alive.

• Return of Purchase Price: Upon the death of the annuitant, the sum invested is refunded to the nominee.
  
  

Drawbacks of Annuity Plans:

• Lower Returns: Annuities generally provide fixed returns, which often do not beat inflation over the long term.

• Limited Flexibility: Once you purchase an annuity, you cannot access the lump sum amount or change the terms of your plan.

• Higher Charges: Some annuity plans have high administrative charges, making them more expensive than they appear at first.
  
  

What is SIP (Systematic Investment Plan) and SWP (Systematic Withdrawal Plan)?

• SIP (Systematic Investment Plan): SIP is an investment strategy where you invest a fixed amount of money at regular intervals (monthly, quarterly) into mutual funds. SIPs offer a disciplined way to invest, take advantage of rupee cost averaging, and benefit from the power of compounding over time.

• SWP (Systematic Withdrawal Plan): Once you have accumulated a corpus through SIPs, you can opt for an SWP. It allows you to withdraw a fixed amount periodically (monthly, quarterly) from your mutual fund investments, creating a regular income stream without having to sell your investments all at once.
  
  

SIP and SWP: A Smart, Flexible Alternative to Annuity Plans

1. Control Over Your Investment

With an annuity plan, the insurance company controls the investment, dictating your returns and limiting your ability to adjust your income. However, with SIP and SWP, you’re in the driver’s seat. You can:

• Choose Your Funds: Whether you prefer equity, debt, or hybrid funds, you can select the funds based on your risk appetite and financial goals.

• Adjust Your SIP: You can increase or decrease your SIP amount based on changing income levels or financial goals.

• Stop and Restart: Unlike annuities, where you’re locked into a contract, you can stop your SIP whenever needed and restart at your convenience.
  
  

2. Higher Returns Potential

Annuity plans offer fixed returns that typically range from 4-6% per annum. While they provide stability, they often fall short of delivering inflation-beating returns.

On the other hand, SIPs in equity mutual funds can offer much higher returns, potentially between 10-15% over the long term, depending on market conditions. These returns come with volatility, but they offer the possibility of wealth generation that is far superior to the fixed returns offered by annuities.

• Example: If you invest ₹10,000 per month in an SIP in a high-performing equity mutual fund, after 15 years, assuming an average return of 12%, you could accumulate approximately 50.45 lakhs. In contrast, a similar investment in an annuity might provide much less, as the fixed returns won’t keep up with the growth potential of equity markets.
  
  

3. Flexibility in Withdrawals (SWP)

When you switch to an SWP, you can tailor your withdrawals based on your needs. Annuity plans, however, lock you into a fixed income structure without the option to change withdrawal amounts. Here’s the key difference:

• SIP + SWP: You can withdraw the amount you need while your investments continue to grow.

• Annuity: Fixed payouts, often not customizable and not flexible.
  
  

4. Tax Efficiency

Annuity income is taxed as regular income, which may push you into a higher tax bracket, especially if the payouts are large.

With SIPs, you can invest in tax-saving mutual funds (ELSS) to get tax deductions under Section 80C. Additionally, long-term capital gains (LTCG) from equity mutual funds are taxed at a favorable rate of 12.5% on gains over ₹1.25 lakh.

5. Liquidity

Unlike annuity plans, which lock your money for a long period, SIPs give you liquidity. You can access your money at any time (subject to exit loads in certain cases). This is crucial in times of emergencies when you need quick access to funds.

Example Comparison: Deferred Annuity vs. SIP + SWP Strategy

Let’s consider two scenarios where you’re investing ₹1.2 lakh per year for 12 years, and after that, you wish to receive a monthly income.

Scenario 1: Deferred Annuity

In this case, you invest ₹1.2 lakh every year for 12 years. After 12 years, you defer the annuity for 5 years and then start receiving monthly payments.

• Total Investment: ₹1.2 lakh x 12 = ₹14.4 lakhs.

• Deferral Period: 5 years.

• Assumed Annuity Return: 5% p.a.

• Monthly Payment: After the deferral period, you start receiving a fixed amount. Depending on the plan, you might receive approximately ₹10,000 - ₹12,000 per month (this can vary depending on the insurer, terms, and returns).
  
  

Scenario 2: SIP + SWP Strategy

Now, let’s assume you invest ₹10,000 every month for 12 years, and after 12 years, you defer the withdrawals for 5 years. After the deferral, you start an SWP to withdraw a fixed monthly amount.

• Monthly SIP Investment: ₹10,000 per month.

• Total Investment: ₹10,000 x 12 x 12 = ₹14.4 lakhs.

• Assumed Return on SIP: 12% p.a. (typical for equity mutual funds over the long term).

• Total Corpus After 12 Years of SIP: The corpus at the end of 12 years with an assumed 12% return would be approximately ₹32.23 lakhs.
  

After the 12 years of SIP, we now defer the SWP withdrawals for 5 years. During this period, the investment continues to grow at the same 12% return. After 5 years of deferral (17 years in total from the start), your corpus grows further.

• Corpus After 17 Years (12 years SIP + 5-year Deferral Growth):
  The corpus will grow at 12% over the additional 5 years. So, the total corpus after 17 years could be approximately ₹56.80 lakhs (using the compound interest formula).

After 17 years, you start the SWP. Assuming you wish to withdraw ₹50,000 per month:

• Monthly SWP Withdrawal: ₹50,000 per month.

• Duration of the SWP: With ₹56.80 lakhs and withdrawing ₹50,000 per month for next 15 years, so you will withdraw total of 90 lakhs, with around 14 lakhs still remaining in the corpus, you can continue the SWP or take that 14 lakhs out in a lumpsum manner,(this can vary with market fluctuations, as the corpus continues to grow during the SWP period, depending on the returns, assumed 8% annual returns after the SWP starts).
  
  
  

Conclusion: Why SIP + SWP Makes Sense

Annuity plans may seem like an attractive option for a fixed income in retirement, but they come with limitations. The SIP + SWP strategy offers higher returns, greater flexibility, and complete control over your investments. You can tailor your strategy to suit your specific needs, adjust your withdrawals, and optimize your portfolio for the long term.

Rather than settling for a rigid, fixed income from an annuity, consider using SIPs to build your wealth and then use SWPs to generate a regular income stream. Over time, this method can offer better returns, tax efficiency, and personalized control—making it a smarter, more adaptable strategy for achieving financial freedom in your retirement years.

By taking control of your investment strategy, you’re not just creating an income stream; you’re building your financial future with flexibility, growth potential, and peace of mind.


You have the flexibility to experiment with different investment amounts and see how your returns could look over time using our interactive calculators. Feel free to adjust the numbers based on your goals and get a personalized estimate of your potential investments. Click here