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Planning for retirement is a crucial aspect of everybody’s lives. Considering the rising inflation level and limited social security initiatives for senior citizens, it is vital that you start planning your retirement early. The article discusses the importance of pension plans and different types of retirement plans available in India.

  1. What are Pension Plans?
  2. Who should opt for Pension Plans?
  3. Features & benefits of retirement plans
  4. How does a pension plan work?
  5. What are the types of pension plans in India?
  6. Tips to remember when buying a pension plan

 

1. Pension Plans

Pension plans or retirement plans offer you the dual benefits of investment and insurance cover. Invest a certain amount regularly towards your pension plan to accumulate corpus in a phase-by-phase manner. This will ensure a steady flow of monthly pension once you retire. For example, Public Provident Fund is a popular retirement planning scheme.

When you start contributing to your retirement early, the funds build a secure golden year money-wise over the years. 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.

 

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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 allow several retirement plans that also offer 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 the double benefit 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 plan) or immediately after investing (immediate plan), based on how you invest. This ensures you a financially independent life after retiring. Use a retirement calculator for a rough estimate of how much money you might require monthly after retirement.

b. Tax-Efficiency

Pension plans are entitled to tax exemption specified under Section 80C. If you wish to contribute to pension plans, the 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.

c. Liquidity

A retirement plan is essentially a product of low liquidity. However, some companies allow withdrawal even during the accumulation stage. This will ensure funds to fall back on during emergencies without having to rely on bank loans or others for financial requirements.

d. Vesting Age

This is the age when you begin to receive the monthly pension. For instance, most pension plans keep their minimum vesting age at 40 or 50. It is flexible up to age 70, though some companies allow the vesting age to be up to 90.

e. Accumulation Duration

An investor can either choose to pay the premium in periodic intervals or at once as a lump sum investment. The wealth will simultaneously accumulate over time to build up a sizable corpus (investment+gains). For instance, if you start investing at the age of 30 and continues investing until you turn 60, the accumulation period will be 30 years. Your pension for the chosen period primarily comes from this corpus.

f. Payment Period

Investors often confuse this with the accumulation period. This is the period in which you receive the pension after retiring. For instance, if one receives a pension from the age of 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 years old with an expected lifespan of 80 years. Her current salary is Rs.50,000 and she wishes to retire at the age of 60. She is looking for a monthly pension of Rs.30,000 post-retirement. How much do you think she should invest until the age of 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.

 

Pension Plans

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.

SL No.

Plan Type

In Detail

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 post maturity 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.

 

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