1. Pension Plans
Pension plans or retirement plans offer you the dual benefits of investment and insurance cover. It is nothing but investing a certain amount regularly to accumulate over a specific tenure in a phase-by-phase manner. This will ensure a steady flow of monthly pension once you retire. Provident Fund, for example, is a popular retirement planning scheme.
If you begin contributing early, it will build towards a secure golden year money-wise. A well-chosen retirement plan can help you rise above inflation, thanks to the power of compounding. The corpus (investment+gains) in your name by the retiring age can take care of increasing healthcare costs and lifestyle requirements.
2. Who should opt for Pension Plans?
Anybody who wants to secure their retired life financially should start investing in pension funds. Section 80C also allows a number of retirement plans for tax deduction up to Rs. 1.5 lakhs. Any fund you choose must align with your investment goals (or retirement plans). For instance, if you wish to retire early, your corpus upon maturity should be enough to support the additional years. So, the key is to scheme smartly. Then you will be able to enjoy 2-in-1 benefits of building wealth while saving on income tax.
3. Features & Benefits of Pension Plans
a. Guaranteed Pension/Income
You can get a fixed and steady income after retiring (deferred) or immediately after investing (immediate), based on how you invest. This ensures you a financially independent life. Use a retirement calculator for a rough estimate of how much money you might require monthly after retirement.
Pension plans are entitled to tax exemption specified under Section 80C. If you want to contribute to pension plans, the Indian Income Tax Act, 1961, offers significant tax respite under Chapter VI-A. Section 80C, 80CCC and 80CCD specify them in detail. For instance, Atal Pension Yojana (APY) and National Pension Scheme (NPS) are subject to tax deduction under 80CCD.
A retirement plan is essentially a product of low liquidity. But some companies offer pension funds that let you withdraw even during the accumulation stage. So, you will have funds to fall back on during emergency without having to rely on bank loans or borrow from other people.
d. Vesting Age
This is the age when you begin to receive the monthly pension. For instance, most pension plans keep their minimum vesting 40 or 50. It is flexible up to age 70, though some companies do allow the vesting age to be up to 90.
e. Accumulation Duration
The investor pays the premiums regularly or once in this period. This is when the wealth accumulates to build up a sizable corpus (investment+gains). For instance, if you start investing at the age 30 and continues investing till age 60, the accumulation period will be 30 years. Your pension for the chosen period essentially comes from this corpus.
f. Payment Period
Do not confuse this with accumulation period. This is the period in which you receive the pension after retiring. For instance, if one receives the pension from the age 60 to age 75, the payment period will be 15 years. Most funds keep this separate from accumulation period, though some funds allow partial/full withdrawals during accumulation periods too.
g. Surrender value
Surrendering one’s pension plan before maturity is not a smart move even after paying the required minimum premium. This results in the investor losing every benefit of the plan including the assured sum and life insurance cover.
4. How a retirement plan works (example)
Priyanka is 32 and her current salary is Rs. 50,000. She wants to retire at age 60 with an expected lifespan of 80 years. She is looking for a monthly pension of Rs. 30,000 post-retirement. How much do you think she should invest until age 60 to meet her investment goals?
Priyanka will need a corpus of Rs 4.05 crores to receive an income of Rs 30,000. Let us assume a long-term return of 12% till age 60 and 5% after that, with 6% inflation rate. Based on these figures, she must invest Rs. 14,820 monthly for the next 28 years. If all goes according to plan, Priyanka is going to lead financially secure golden years. You may also use this retirement planning calculator to arrive at a number.
5. Pension Plan Types in India
It is never too early or late to start thinking about retirement plans – the sooner, the better. Whether you are salaried or entrepreneurial, there is a slew of pension plans you can choose from as listed below.
|1||Deferred Annuity||Systematic premium or one lump sum premium over the tenure
Pension begins after completing the term
No taxation (unless you withdraw the corpus)
|2||Immediate Annuity||Only lumpsum investment allowed
Pension begins immediately after investment
Income Tax exempts tax on the premiums
The nominee can claim the pension or the corpus after the passing of policyholder
|3||Annuity Certain||The pension is disbursed for a specific period
The policyholder can choose a period (say, age 65-70)
The nominee can claim the pension after the demise of the policyholder
|4||With Cover Pension Plan||Comes with a ‘cover’ policy – policyholder’s dependents are entitled to a lump sum after he/she expires
The insurance amount is not large a most of the premium goes towards building the corpus
|5||Life Annuity||Pension paid till death
‘With spouse’ option – spouse continues to receive after the policyholder’s demise
|6||National Pension Scheme (NPS)||Launched and managed by the central government
Your money will be distributed in equity and debt markets as your preference.
Withdraw 60% when you retire, and the rest should be used to buy the annuity
The tax levied on the 20% of the corpus you withdraw upon maturity
|7||Pension Funds||Better returns once it matures
Regulated by the government body, Pension Fund Regulatory & Development Authority (PFRDA)
Currently, 6 fund houses in India are authorized to offer pension funds. Example, SBI
|8||Guaranteed Period Annuity Plan||Annuity disbursed for specific terms like 5 to 20 years.|
6. Tips to remember before buying a Pension Plan
a. Make a rough estimate of your future financial goal(s)
b. Consider your current income and fix an amount to put towards the plan
c. Research the available plans, read the benefits offered postmaturity and choose accordingly
d. Understand the product before jumping at the cheapest option
e. Do not choose a product only because of tax-friendliness
If you think any of the above pension plans suit your investment goals and current income, start investing.