Pension plans are also called retirement plans, in which you can put a segment of your income in order to receive an income post-retirement. Taking into consideration the ever-increasing inflation, it has become quite fundamental to invest a part of your resources into a pension plan for the future. Investment funds generally get used in covering unforeseen expenses and necessities. Pension plans help in providing financial security, for the time when your regular and fixed income starts to ebb, you still can live a comfortable and prestigious life. Appropriate pension plan allows you to enjoy your post-retirement life and dreams in a systematic and comfortable manner without any tension. Pension plan will thus work as a saviour in times of urgency. They also protect against uncertainties that may arise post-retirement. With the help of pension plans, you can effectively plan your retirement life and follow your dreams and passion.
What is Pension Plan?
Pension plan or retirement plan is a type of investment plan which helps you to accumulate a part of your savings over a long-term period so that you can have a secured future post-retirement. With the help of pension plans, you can deal with the financial uncertainties of post-retirement times and ensures a steady flow of income. Even if you have a good amount of savings in other instruments, it would be highly crucial and beneficial to have a pension plan. A pension plan is like a financial cushion for the long-term that ensures that you have a financially sound future post-retirement. In the pension plan, the insured needs to contribute a specific amount on a regular basis for accumulation until the time of retirement. Later, the accumulated amount is given back to the insured as pension or annuity at regular times of interval. With the help of the best Pension plan, you can allocate a part of your savings to ensure future security and financial stability. It is a tool that offers complete safety to the insured to continue living a comfortable life post-retirement and not compromise on the standard of living.
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Why do you need Pension Plan?
Pension plan provides many benefits. There are several reasons why one must buy pension plans. Mentioned below are the most effective reasons for buying the best pension plan for yourself:
Financial Security :
Investment in pension plans would help in building a corpus that generates large cash revenue.
Wealth Creation :
In order to create wealth, pension plans work as the factors of growth of your money.
Be Prepared for Emergencies: :
A medical emergency can cause financial crisis. Investment in pension plan helps you be prepared for these and other emergencies.
Assist in Achieving Financial Goals
Buying a pension plan helps you achieve long-term life goals and responsibilities like buying a house, car, marriage in the family, etc.
Types of Pension Plans in India
Deferred Annuity :
A deferred annuity plan allows you to accumulate the corpus through either single premium payment or regular premium payment over the period of policy term. It offers different benefits to the insured. Moreover, tax exemption benefits can also be availed under this type of pension plan.
Immediate Annuity :
In the immediate annuity plan, the insured can receive pension immediately. On payment of a lump-sum amount, the policyholder can receive instant payment of pension. Under this scheme, policyholders can choose from different annuity options, and can also avail the benefit of tax-exempted premium. The nominee of the plan becomes the receiver of money in case of the demise of the policyholder during the policy tenure.
Annuity Certain :
Under this type of pension plan, the annuitant gets the annuity paid for a specific number of years. The annuitant can select the period of payment and thus receive the payment accordingly. In case of the annuitant passing away, the amount can be received by the beneficiary of the policy.
With and Without Cover :
The pension plans with cover have the component of life cover added in the plan. On the death of the policyholder, the beneficiary gets paid a lump-sum amount. The pension plan without cover offers no life cover to the insured policyholder. On the death of the insured, the nominee receives the corpus.
Guaranteed Period Annuity :
Under guaranteed period annuity pension plan, the policyholder receives annuity for a certain period like 5 years, 10 years, 15 years, or 20 years, regardless of the survival of the insured.
Life Annuity :
Under life annuity plan, the annuitant is paid the pension amount until death. In case of the death of the policyholder, and under the chosen option of ‘with spouse’, the spouse of the policyholder can receive the amount.
Pension Funds :
This type of pension plan remains in force for a long period of time. It also provides a better return upon maturity.
National Pension Schemes (NPS) :
The government of India has introduced a new pension scheme, wherein the policyholder can put the amount of savings in the National Pension Scheme. The money put in this scheme is invested in equity and debt funds and the returns on investment can be generated. Under this scheme, the policyholder can withdraw 60% of the amount at the time of retirement, and 40% of it is used to purchase annuity. The proceeds of maturity under this scheme are not tax-free.
Whole Life ULIPs :
Under this type of pension plan, the money stays invested for the whole life of the insured and at the time of retirement, the policyholder can make partial withdrawals and get a tax-free income. They can also make additional withdrawals whenever necessary.
Defined Benefit :
Under the defined benefit type of plans, the policyholder can pay a specific amount from their retirement income. This is decided on the premise of the pension amount, that is determined on the basis of the employed policyholder’s earnings as well as number of years of service.
Benefits of Pension Plan
Modern life is full of increasing uncertainties. In such times it becomes more difficult to tackle the sudden risks, especially when you do not have sufficient financial resources. This would lead to extra stress and financial burden to individuals living their post-retirement life. Hence, getting a pension policy and planning for the future helps in dealing with these financial uncertainties in a stress-free manner.
As an individual gets old, their health-related problems and expenses are likely to get increased. Ageing and health problems are the two aspects that go hand-in-hand. Thus, medical expenses can be a huge dent during post-retirement period, when there is no regular permanent income on a monthly basis. Moreover, the medical and health expenses are rising rapidly. Therefore, with the pension policy, you would be able to accumulate money that would be enough to cover all medical expenses post-retirement.
Most pension funds give an option to the investors to choose the asset class to which they would like maximum exposure. As an investor in pension plans, you can choose amongst pure equity, pure debt, or a mix of both equity and debt.
Looking at the lifestyles of people in modern India, it is evident that it is not always possible for parents to rely on their children for monetary support. There is a culture of nuclear families growing rapidly, with retired parents living on their own. It is with the help of the best pension scheme savings and planning that individuals can be financially independent and tension-free.
Be Prepared for
Inflation is the constant and rapid rise in the price of goods and services. India faces high rate of inflation in all the fields. Hence, it requires us to plan for long-term financial needs of ourselves as well as our family. Proper retirement pension plan is one of the most efficient options of long-term planning and overcoming the risks of inflation.
Features of Pension Plan
This is the most distinctive feature of a pension plan, and comes in two types, immediate annuity and deferred annuity. Immediate annuity starts immediately, so you can start receiving the pension right after you pay the lump sum premium amount. In the immediate pension fund, you also get the single premium payment option, so that the insurance company can use the money invested by the policyholder to build up the investor’s corpus. In deferred annuity, you start receiving the pension after certain years of premium payment.
On getting retired, under the pension policy, you will receive a fixed and steady income. You can also start receiving this income right after you invest, depending on the plan of your selection and the amount invested. Based on this, you can be financially independent even in the post-retirement life.
Pension plan usually has low liquidity, as it collects money for the retirement. However, some insurance providers offer withdrawal even at the accumulation stage.
Investors in pension plans are liable to receive tax benefits under section 80C.
Sum assured is the pre-defined amount offered to the insured during the policy tenure. The sum assured is determined by different companies in different ways.
Accumulation period is the time from which you start investing until the time you invest. Investors can choose to pay the premium at one go or in periodic intervals. The premium invested in accumulated over a long-term period to create a future financial cushion.
Vesting age refers to the age from which the investor starts receiving the pension. Most of the pension plans keep the minimum vesting age at 45 to 50 years. Some insurance companies also allow vesting age till 90 years.
Surrender value of a pension plan is the amount the insurance company will pay the investor if they surrender the plan before its maturity. This is possible only if the investor has paid the premium for the minimum period.
How to Calculate Pension Plan Return?
It is important to strategically plan your retirement and generate the retirement corpus. As an investor you must also know how to opt for the plan that is best for you, by estimating the offered returns. You can calculate the returns of your pension plans in a simple and easy manner with the help of the online pension calculator. You can easily calculate the return of your pension by entering information related to your savings, your current financial liabilities, your expenditure, monthly expenses, total sum required. Based on this information the online calculator calculates the returns on an estimated basis and you can have an approximate value. For filling the details, firstly, you must split your current monthly expenses in two. Then, you must calculate the expected post-retirement income, in terms of EPS of the pension scheme. Calculate the net income required in retirement, along with the future value of the additional income required during your retirement and the retirement corpus that would be needed at the age of 60. Find out how much fund is accumulated through various instruments like PPF, EPF, bonds, pension plans, etc. Based on that, calculate how much your current retirement corpus will grow out to be. Later, calculate the additional corpus required for retirement. Also calculate how much saving is required per month for meeting the additional corpus requirement. Lastly, add up the on-going investments to know how much more is required to invest.
Who should buy a Pension Scheme Plan?
Pension plan is helpful for anyone who is willing to lead a comfortable post-retirement life, would require to save up and plan for it well in advance. Having financial self-sufficiency post-retirement is a great boon. Due to the tight schedule and constraints of work life, you might not have been able to fully realize your dreams, passions, and hobbies. In such a case, you are most likely to put those dreams into the backseat until retirement and pursue them successfully then. Retirement plans and schemes are the best for you if you want to live your post-retirement life without any financial burden and live it to the fullest. These schemes are also most suitable for you if you live in a nuclear family. Moreover, if you are someone who wants lifelong security even after retirement, and want to live according to the quality of life that you expected by working all your life, then having a retirement plan/scheme is a must. It will not only help you relieve financial stress, but also fulfil your biggest dreams, liabilities, and responsibilities out of the savings and fund collected from your lifelong earnings.
How to choose Best Pension Scheme?
Choosing the right retirement plan for your future needs is the most crucial part of finalizing your best retirement plan. In order to know what plan suits you best, there are certain factors to be considered and steps to be followed. They are as mentioned below:
- Consider the following factors:
- Your current age
- Your current income
- Amount of income you wish to receive post-retirement
- Maximum amount of premium you can afford to pay
- The period for which you will pay the premium
- Do an in-depth research of the available plan options.
- Understand the product thoroughly and make an informed decision.
- Do not choose a product only for the tax benefits.
Mentioned below are the documents required for the pension scheme process:
- Proof of age like PAN card, driving license, passport, etc.
- Proof of identity like Aadhar card, passport, voter ID, driving license, etc.
- Proof of address like Aadhar card, driving license, passport, etc.
- Proof of income like salary slips
- Passport size photograph
Retirement Insurance Frequently Asked Questions (FAQs)
*‘Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time’
The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale