Deferred annuity
An annuity whose payments start at a vesting age some time after purchase, so the corpus is built or held in the deferment period and income is locked in for the later years of retirement.
In plain language
An immediate annuity starts paying straight away, at the frequency chosen. A deferred annuity starts paying later — at a vesting age that is some time away.
The workbook uses it for one job above all: insurance against living too long. Its own example is an annuity purchased at age 65 with income paid only from age 85 for life. Money spent before 85 can then be planned for a known horizon, because anything after 85 is already covered.
It is the product answer to longevity risk, and the reason it appears in the protection strategies rather than in the income chapters.
How it works
The mechanics. In the deferment period the corpus is built. At the vesting age it is used to buy the annuity at the rates applicable at that time (Chapter 6). An immediate annuity, by contrast, begins payments immediately at the chosen frequency.
Where the workbook deploys it:
| Chapter | Use |
|---|---|
| 1, section 1.1.4 | Bought at 65, paying from 85 for life — "will take care of the risk of longevity" |
| 3, section 3.5.1 | Close to retirement, when the corpus can no longer be increased, lock in a lifetime income starting later in retirement |
| 7, Protection Strategies | Postpone the vesting date of any annuity to the middle retirement years where a second career covers the early years |
| 7, Diversified Income Strategy | Defer annuity payments to the middle and later years when income is not supported by a second career |
Why it works. The corpus is needed most in late retirement, when the dependence on it is highest and the ability to earn is lowest. Deferring the annuity assures income exactly there, while the rest of the corpus handles a shorter, knowable stretch.
Within the NPS, a subscriber eligible for normal exit may defer the purchase of the annuity up to age 85, as the regulations permit (Chapter 4, section 4.2.4).
A worked example
Meena retires at 60 with a corpus of Rs 1,00,00,000. She has no idea whether she will live to 78 or 98 — and a plan built for one fails the other.
She earmarks Rs 15,00,000 to secure a lifetime income that begins at 80, following the workbook's 65-to-85 pattern. What that sum buys depends on insurer rates at the time, so no payout is assumed here.
The remaining corpus now has a fixed job with a fixed end date:
Corpus for ages 60 to 80 = 1,00,00,000 − 15,00,000 = Rs 85,00,000
Horizon = 20 years
Simple draw (no return) = 85,00,000 ÷ 20 = Rs 4,25,000 a year
(The zero-return division is a deliberate simplification — any return earned only improves it.)
Compare the alternative with no deferred annuity. To be safe to 98 the same Rs 1 crore must last 38 years:
Simple draw (no return) = 1,00,00,000 ÷ 38 ≈ Rs 2,63,158 a year
Rs 1.62 lakh a year less to live on in her sixties and seventies, spent insuring against a long life she may not have. The deferred annuity lets her spend as though retirement ends at 80, without it actually ending her income there.
Why NISM asks about it
Chapter 1, section 1.1.4 (Increasing Life Expectancy), introduces the deferred annuity as the example of managing longevity. Chapter 3, section 3.5.1, repeats it among the responses to underestimating years in retirement. Chapter 6, section 6.2.2, defines immediate and deferred annuities side by side, and Chapter 7 uses postponed vesting in both the protection strategies and the diversified income strategy. Expect a scenario question asking which product addresses the risk of outliving the corpus.
Common exam traps
- The annuity rate is set at vesting, not at the start of deferment. Chapter 6: the corpus is used to buy the annuity "at the rates applicable at the time of buying the annuity".
- A deferred annuity is a longevity tool, not an inflation tool. Once it starts it is as fixed as any other annuity.
- Immediate means payments start at purchase, at whatever frequency is chosen — not necessarily monthly.
- Deferring works best with an alternate income in the early years, such as a second career. Without one, deferring simply shifts the draw onto the rest of the corpus.
- Deferral is not the same as the NPS option to continue in the scheme. Both exist; the NPS permits deferring the annuity purchase and the lump sum up to 85.
- Do not confuse the vesting age with the retirement age. In the workbook example they are 20 years apart.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Life expectancyThe average period a person is expected to live, based on birth and death statistics. In India it rose from 58 years in 1990 to 72 in 2024 — good news that creates longevity risk for retirement.
- Longevity riskThe risk that a person outlives their retirement assets — living longer than the plan assumed, so the corpus runs out while income is still needed.
- AnnuityAn insurance contract in which a corpus paid as a lump sum or in instalments buys a periodic payment from the insurer, at a rate fixed at purchase and guaranteed for life or the contracted term.
- Annuity Service ProviderAn IRDAI-registered life insurance company empanelled by PFRDA to sell NPS subscribers the annuity they must buy on exit, and to pay the pension for the life of the contract.
- Immediate annuityAn annuity whose payments begin soon after it is bought — generally within 12 months — usually purchased with a single lump-sum premium at retirement.
- Distribution stageThe retired years, in which the corpus built during working life is converted into periodic income — the stage where protecting capital matters more than growing it, because it can no longer be topped up.
- Years in retirementThe number of years from the start of retirement to the end of life for which income must be secured. It cannot be known precisely and directly sets the size of the retirement corpus.
- Accumulated pension wealthThe official NPS term for the money value of the pension investments in a subscriber's Permanent Retirement Account — the figure that decides how much can be taken as a lump sum and how much must buy an annuity.
- Annuity finalityThe rule that once an annuity is bought, it is locked in for good — the principal cannot be redeemed and the type of annuity chosen cannot be changed.
- Staggering income investmentsBuying income-generating retirement products in tranches over time, instead of committing the whole retirement corpus at once, so a retiree is not locked into one interest-rate environment for life.
- Superannuation benefitAn employer-funded retirement scheme, on top of the mandatory PF, that pays one-third of the accumulated corpus as a lump sum and converts the rest into an annuity.
- Second careerPaid work a retiree takes up in the early retirement years, not necessarily connected to their old job, used to delay drawing on the retirement corpus or to help close a shortfall in it.
- Normal exitExit from the NPS on reaching the scheme's qualifying event — 60, or 15 years of subscription under the All Citizen Model — with a larger lump-sum share than a premature exit and a smaller compulsory annuity.
- Joint annuityAn annuity payout option under which the spouse continues to receive the annuity for lifetime after the death of the investor.