Annuity vs SWP on ₹50 lakh: income, inflation, legacy

Two ways to turn a corpus into income

At retirement, ₹50 lakh can buy one of two things:

• An annuity. You pay the insurer once. It pays you a fixed amount every year for life, then stops (or, in some variants, returns the purchase price to your nominee).
• A systematic withdrawal plan (SWP). You keep the ₹50 lakh in a mutual fund and redeem a set amount each month or year. What is left belongs to you and your heirs.

The rates below are assumptions for the arithmetic, not quotes: an annuity rate of 7% for a life annuity with no return of purchase price, and a fund return of 8% a year for the SWP.

What each pays

The 7% annuity pays ₹3,50,000 a year, guaranteed, for as long as you live. It does not grow.

An SWP taking the same ₹3.5 lakh a year (withdrawn at the start of each year) from a fund earning 8%:

The flat SWP looks easy: the fund earns more than you take, so the corpus grows. But the flat SWP and the annuity share the same problem: neither keeps up with prices.

What inflation does to a fixed ₹3.5 lakh

At 6% inflation a fixed payment loses buying power quickly:

By your mid-eighties the annuity buys less than a third of what it bought at 60. That is why the realistic SWP comparison is the rising one, and the rising one can run out.

How tax differs

• Annuity: every rupee received is income taxed at your slab rate.
• SWP: each redemption is part capital, part gain. Early on, most of what you take out is your own money coming back, so the taxable gain is small. For an equity-oriented fund, long-term gains up to ₹1.25 lakh a year are exempt, and the rest is taxed at 12.5%.

For a retiree with no other income, the gap may not matter: up to ₹12 lakh of slab income is rebated to zero in the new regime. It matters more if you also draw a pension or rent. The old vs new regime comparison covers which regime fits.

So which?

The choice is less "which earns more" and more "which risk do you prefer to carry":

• An annuity removes the risk of outliving the money and the risk of a bad market at the wrong time. In return you accept a payment that inflation erodes and, in the no-return variant, nothing left for heirs.
• An SWP keeps flexibility, inflation-linked withdrawals and a legacy. In return you carry market risk, and especially sequence-of-returns risk: a fall in the first few years does far more damage than the same fall later.

Many retirees split the corpus: an annuity covering essential bills, an SWP for the rest. To test your own numbers, use the SWP calculator walkthrough. For a structure built around buckets, see the three-bucket retirement strategy.

Reading this

• The 7% annuity rate, 8% fund return and 6% inflation are assumptions, not offers or forecasts. A real fund's return varies year to year.
• Withdrawals are taken at the start of each year, and the fund return is applied to what remains.
• This compares structures. It does not recommend any annuity product or fund.