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We all work hard and save money for one of the key stages of life i.e. ‘Retirement’. It is essential to have enough savings post your retirement in order to sustain your lifestyle the way you’ve always been living. Therefore, “Pension Plan” plays a very important role in your financial planning.
Everyone would like to continue living a lifestyle the way you have been living during your working life, which is why Pension Plans are also known as ‘Retirement plans’. A certain amount of your current income is transferred and stored for your future by your employer. This amount is then given to the employee as pension fund on his/her retirement.
Pension Plans are known as retirement plans that require you to make contributions into a pool of funds set aside for your benefit in future. This pool of fund is invested on your behalf, and the earnings on the investment generate income on your retirement.
For your retirement plan, there are heaps of pension plans available in the market. These plans are different from each other. Their benefits, features, exclusions etc. are different too. Pension plans are basically an investment or saving tool to provide for your future retirement needs.
All the pension plans are divided into two parts.
The first part is accumulation where you (insured) pays the premium.
The second part is distribution.
Here, you are paid a regular income through an annuity plan after your retirement. Annuity Plan is a type of insurance which starts paying you an income from the start as per the options chosen by you.
Following are the types of Pension Plans in India.
This pension scheme allows you to accumulate corpus through regular premiums or through single premium over a policy term. Once the policy term is over, the pension will begin. The benefits of deferred pension plans are massive. It also includes tax benefit that is associated with this pension scheme. There is no tax levied on the money invested in the plan unless he/she withdraws it. This scheme can be purchased by making regular or by one-time payment towards it. Thus, this plan suits all types of investors.
In this scheme, pension starts immediately. You have to deposit a lump-sum amount and pension will start immediately on basis of the amount invested by the policyholder. You can choose from a range of annuity options available. Also, the premium paid is exempted as per the Income Tax Act, 1961. And, in case of death of the policyholder, the nominee/beneficiary will be entitled to get money as per the option selected.
A few annuity options preferred by many people are:
The annuity is paid to the annuitant for a specific number of years as per this clause. The annuitant has the right to choose the period and in case he/she dies before exhausting all the payments, the annuity will be paid to the beneficiary/ nominee. As per this plan, annuity is given to the life assured for certain periods like 5, 10, 15 or 20 years whether or not he/she survives that duration.
As per Life Annuity option, the pension amount will be paid to the annuitant until his/her death. However, if you choose the ‘with spouse’ the amount of pension will be given to the spouse of the policyholder (in case of death).
The pension plans with cover have a life cover component in the plan and states that a lump sum amount will be paid to the family members on the death of the policyholder. The cover amount here is not high, as a major part of premium is diverted towards growing the corpus than covering the risk of life.
On the other hand, without cover pension plan states that there is no life cover. And, in case of an unfortunate death, the nominee/beneficiary of the policy will get corpus accumulated (premiums paid till the date of the death).
The NPS was introduced by the Government for people to build up the pension amount. However, you can put your savings in the new pension scheme where your money will be invested in equity and debt market as per your preference. Also, you can withdraw 60% of the amount at retirement and rest 40% can be used to purchase the annuity.
Note: Maturity amount is not tax-free.
Investing in Pension funds is a smart option as these plans remain in force for a long time and also offer better returns at maturity. The Pension Fund Regulatory and Development Authority (PFRDA), established by the government body allows 6 companies as fund managers.
Vesting age refers to the age at which the policyholder of a pension plan starts receiving your monthly pension. In most cases, the minimum vesting age is generally between 40 years and 50 years and is flexible up to the age of 70 years. However, there are a few companies that extend their vesting age till 90 years.
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.
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.
In this period the investor pays regularly or once in this period. This is the time when your wealth starts accumulating in order to build a huge corpus. For example: In case you start investing at the age of 25 years and continue investing till the age of 60. Here, your accumulation period will be 35 years and your pension for the chosen period comes from this corpus.
A pension plan is essentially a low liquidity product. There are insurance companies that offer pension funds that are designed to enable policyholders to withdraw your pension amount at the time of accumulation stage. This feature ensures that are always prepared for an unforeseen emergency, in case it arises. Most importantly, it prevents you from being dependent on banks for a loan under such situations.
This serves the purpose of a stable and reliable source of income after your retirement or as per your preference. This enables you to plan in advance, so that you are financially independent even after your retirement. It is recommended that you use the retirement calculator to get a rough estimation of the retirement corpus you need to aim for. For instance, if you want to build a corpus of Rs. 5 crores as your retirement plan, you have to pay your premiums accordingly.
Policyholders of pension plans can avail tax exemptions under Section 80C of the Income Tax Act, 1961. Besides this, there are other provisions for tax benefits as per Chapter VI-A of Section 80C, Section 80CCC and Section 80CCD of the Income Tax Act, 1961. For example, the NPS (National Pension Scheme) and Atal Pension Yojana (APY) are both subject to tax deductions as per Section 80CCD of the Income Tax Act, 1961.
It carries a guaranteed death benefit. This is the amount that the nominee can avail on the unforeseen death of the policyholder during the tenure of the pension plan, and is generally 105% of the total premium paid till then. It also includes the benefits of top ups that the policyholder may have selected while purchasing the pension plan. For a plan that has been discontinued, the Death Benefit comprises of the accrued funds against the plan.
In the case of the unforeseen death of the pension plan accountholder, the nominee can opt for any one of these 3 options - withdraw 1/3rd of the maturity amount, utilize the entire benefit amount to buy an annuity plan, or choose a combination of both.
Every ULIP pension plan has varied investment objectives and risk appetites. Some prefer investments that generate high returns within a short time by exposing the portfolio to comparatively high market risks. Short term equity investments are suitable for such investors. In contrast, some others have a low or moderate risk appetite and, therefore, prefer investing over a long term. The type of pension plan you will select will determine the returns you can avail.
You will always find pension plans which carry different limit in terms of maximum and minimum investment. Therefore, it is essential to check your budget before you invest.
Return is the most important part of any investment. Thus, it is important to choose a pension plan only after you have a fair idea about the returns it would provide. Besides, always remember the rate of return will be low if the returns are guaranteed. So, choose wisely an option which may provide high returns.
Nowadays many insurance companies offer additional benefits like life cover, tax advantage, etc. along with the traditional pension plan. Choosing a plan that may offer you additional benefit before you make the final selection. This will, in turn, help you in future.
There are some investment plans which have a lock-in period where you cannot withdraw money at that specific time. However, there are some companies that offer plans with a certain degree of flexibility with regards to withdrawal.
The Investment Mix part comes into action when pension plans are offered as part of Mutual funds. Therefore, you can always find out investment mix offered by the pension plan.
You can save tax on your pension plan to a certain extent. The plans are exempted under section 80C and your contribution is exempted under section Chapter VI-A. Section 80C, 80CCC and 80CCD.
You can also look for other factors like tax exemption of the interest or dividend which you’re going to receive in your pension plans. Always remember, most of the pension mutual fund dividends are not exempted from tax.
Inflation plays a major role on your lifestyle, apart from age and duration of the policy. You need to narrow down your search on the sum assured and choose a right policy that would be beneficial to your family once you are gone. Seek professional help from insurance advisors of Coverfox.com to solve your dilemma. In short, your investment should beat inflation.
Remember that your pension plans should always compliment your current retirement savings. You should focus on risk/return investments in case you invested too much in conservative instruments.
It is advisable to invest at an early age in pension plans. Your capacity to pay higher premiums can grow only as your income grows. There are certain pension plans that allow increasing the premiums gradually. So, go for it!
One has to fall under a certain age group (between 35-75) to be eligible for a pension plan. The age bracket here may vary depend from one insurer to another.
Nowadays, most of the Pension plans come with an additional/add-on riders that enhance your pension plans. Some of the most common riders available are as follows:
Waiver of premium
Critical Illness rider
Accidental death and dismemberment rider
Here’s the list of all documents that is required to buy pension plan in India:
Document for Age proof – Any of the following can be presented as an age proof
Document for Identity proof – Any of the following document to prove Indian National Citizenship
Document for Address proof – Any of the following document can be used to support your permanent residential address.
Document for Income Proof – Income proof specifying the income of the policyholder.
Submit Proposal Form – Must submit duly filled proposal form to apply for a pension plan.
Medical Reports – Some life insurance companies may ask for a medical check-up before accepting your proposal for a pension plan. Medical reports are required to be submitted.
SBI Life- Annuity Plus offers a comprehensive range of annuity with single payout option. Here, you are assured of a regular annuity/pension for rest of your life. This plan offers the following:
Apart from that, it also offers you a single life annuity, lifetime income with balance capital refund, lifetime income with annual increase of 3-5%, lifetime income for 5, 10, 15 or 20 years.
With ICICI Pru Immediate Annuity Plan, you can choose to make one-time payment and choose from the 5 annuity payout option. Here, you get 4 mode of payouts monthly, quarterly, half-yearly or yearly. The payout option in this plan are as follows:
HDFC Life New Immediate Annuity Plan is a non-linked traditional annuity plan that is designed to offer you various annuity options and provide an opportunity to live your life on your terms even after retirement. You can get the following benefits out of this plan:
This plan was designed to offer the policyholder a plan for retirement that can help him build corpus post retirement, so that they can live their life happily to the fullest. You receive the following benefits from this plan:
Birla Sun Life Insurance Annuity Plan is also a traditional non-participating single premium plan which provides regular income after retirement. It offers you with the following benefit:
HDFC Life Click 2 Retire is an online unit linked pension plan designed for your retirement plan. The plan comes with the following benefits:
LIC of India's New Jeevan Nidhi Plan is a traditional with profits pension plan, offering a combination of protection and saving features. The plan comes with the following benefits:
Max Life Guaranteed Lifetime Income Plan is an annuity plan, which converts your life-long savings into a regular income source. The plan comes with the following benefits:
Bajaj Allianz Retire Rich is a unit linked pension plan that comes with guaranteed vesting and death benefits. The plan comes with the following features:
Reliance Smart Pension Plan is a participating unit-linked pension plan that helps save systematically and build a corpus for your retirement years. The plan comes with the following features:
What should I keep in mind before buying a retirement/pension plan?
First, decide your retirement age and the amount you wish to save. Second, compare various pension plans in terms of vesting age, annuity, surrender charges, premiums, participating or non-participating, maturity benefit and death benefit. Third, seek financial advice from experts.
Which pension plan should I opt- Traditional or ULIP pension plan?
If you are planning way ahead than your retirement, say more than 10 years, it is advisable to opt for a ULIP based pension plan. As the premiums are invested in equity markets and has a good return on investment. However, you should keep in mind the charges levied under a plan. For which, you can compare pension plans.
What if I surrender my pension plan before maturity?
If you surrender pension plan before maturity, you may receive surrender value. However, these surrender value received is taxable as per the tax slab. Moreover, you may have to pay taxes that were exempted for all premiums paid until the exit. Kindly consult your tax advisor for more details on the same.
Is it possible to make early withdrawal from my pension plan?
Yes, it is possible to make early withdrawal from your pension plan. But there are some government regulations and restrictions which are applicable on an early withdrawal.
What are the tax benefits accompanying Pension plans in India?
As a policyholder, you are entitled to tax benefits under section 80CCC of the Income Tax Act which allows you to pay towards your Pension Plan. However, it is only allowed to deduction up to a maximum amount of Rs. 10,000 on your taxable income.
Is it possible to apply for pension plan online?
Yes, pension plans can be applied online. Nowadays, there are various websites which allow you to view pension plan and choose a plan of your choice.
What do you mean by annuity in a pension plan?
The term in annuity in pension plan is used for systematic payouts which you receive after retirement from your pension plan. Also, pension plans allow annuity payouts on a monthly, quarterly, half-yearly or yearly basis.
Can I make payments for pension plans online?
Yes, premium payment for pension plan can be done online. Most of the insurers have a secure payment system where you can make online payments safely without having to visit any branch.
What are the features of pension plans?
The features of pension plans are as under:
What is participating and non-participating pension plan?
A participating policy enables you to share the profits of the company. These profits will be shared with you in the form of bonuses. In the case of non-participating policies, the profits are not shared, which means no bonuses get paid.
What is Public Provident Fund?
Public Provident Fund (PPF) scheme is a popular savings-cum-tax-saving instrument backed by Government of India. Investing in a PPF scheme enables you to build a retirement corpus, while saving on taxes. There is a minimum tenure of 15 years, which can be extended indefinitely in blocks of 5 years.
What is Employees' Provident Fund or Employees’ Pension Scheme?
Employees’ Provident Fund is a retirement benefit scheme that is available to all salaried employees. It acts as a savings platform, helping employees save some portion of their salary each month that can be used should the employee be rendered unable to work, or at the time of retirement.
What is PM Pension Scheme?
The Pradhan Mantri Atal Pension Yojana or PM pension scheme is a government-backed pension scheme introduced to bring the unorganized sector in India under the ambit of pension scheme. This scheme can be availed by individuals within the age group of 18 to 40 years.
What Is National Pension Scheme and its benefits?
Launched in January 2004, National Pension Scheme is a government-sponsored pension scheme, designed to allow systematic savings during the subscriber's working life. NPS provides retirement income with reasonable market-based returns.
The following are the benefits of investing in National Pension Scheme:
What are the advantages of pension plans?
A pension plan is a long-term investment, where you put in small amounts on a regular basis and build a sizeable retirement corpus to take care of your financial future. The earlier you start investing, the more you’ll save, considering the power of compounding. Adding to the list of benefits, is its flexibility. Pension plans can be chosen as per your financial risk appetite. You have the option of choosing to invest in schemes, ranging from aggressive to balanced to conservative.
Can I buy a pension plan?
Most insurance companies in India offer Pension Plans to individuals within the age group of 35 years and 75 years. However, the age group may vary between insurance companies.
Can we withdraw NPS amount?
The entire contribution towards your National Pension Scheme corpus cannot be withdrawn before you are 60 years of age or retirement age. A pre-mature exit is allowed only till a maximum of 20% of your entire corpus, provided you fulfil the following criteria:
How can I open an NPS account?
Follow the below steps to open an NPS account:
How can I open Atal Pension Yojana account?
You can open an Atal Pension Yojana account by following these simple steps:
How do pension plans work?
Here’s how pension plans in India work:
Guaranteed Maturity Benefit: The Maturity Benefit that a policyholder is eligible comprises of either the fund value or 101% of the total premium paid, whichever is higher.
Guaranteed Death Benefit: If the policy is not in discontinued status, it carries a guaranteed death benefit which is Death Benefit, which is the amount that the nominee is eligible for on the unexpected death of the policyholder during the pension plan tenure, is 105% of the total premium paid till then. It also includes the benefits of top ups that the policyholder may have opted for. For a pension plan that has been discontinued, the Death Benefit comprises of the funds that have accumulated against the pension plan in the Policy Discontinued fund.
In the case of the unforeseen death of the pension plan accountholder, the nominee can choose from these three options - withdraw 1/3rd of the maturity amount, or utilize the entire benefit amount to purchase an annuity plan, or opt for a combination of both.
Discontinuation or Surrender Benefit: Now, the accumulated benefits against pension plans cannot be revoked on the discontinuation of premium payment for three years or more, unlike earlier. If a policyholder discontinues or surrenders his/her pension plan within first 5 years, the fund value on the day of surrender will be shifted to Policy Discontinuation Plan, minus the deduction of applicable charges.
How do you invest in a retirement plan?
An effective retirement plan is one that should fulfil the following parameters:
How does retirement plan work?
A retirement plan or pension plan, offered by an organisation, enables its employees to contribute a certain percentage of their income towards a pension plan every month. The employer also contributes the same amount towards the pension scheme account of its employees. The pension payment of employees is decided by the length of his/her working years and annual income till retirement.
Is a pension plan an insurance contract?
Yes, a pension plans offered by an insurance company is an insurance contract.
Is a pension plan guaranteed?
No, not all pension plans offer guaranteed benefits.
Is annuity from Jeevan Akshay taxable?
Yes, annuity earned from LIC’s Jeevan Akshay is taxed according to your income tax slab.
Is Atal Pension Yojana (APY) tax exempted?
No, annuity returns from Atal Pension Yojana (APY) is taxed as per your income tax slab.
Is LIC Jeevan Akshay a good policy?
Yes, LIC Jeevan Akshay is one of the best pension plans from LIC.
Is pension stopped in India?
No. Pension services are running in India.
Is there any pension plan in LIC?
LIC offers 3 different pension plans:
What is a pension plan?
A pension plan, also known as retirement plan, acts as a reliable and stable source of income post retirement. It is a financial plan that enables individuals to save during their work years so that they can reap its benefits for sustaining their usual standard of living after they retire. Organizations that offer pension plans to their employees deduct a certain part from their income towards their individual pension fund. The accumulated amount is given to employees post retirement.
What is a retirement insurance contract?
A pension plan offered by a Life Insurance company is a retirement insurance contract.
What is a retirement policy?
A retirement plan, also known as a pension plan, acts as a reliable and stable source of income after one has retired. It is a financial plan that allows individuals to save during their work years and reap its benefits for sustaining their usual standard of living after they retire.
What is HDFC Life pension guaranteed plan?
The following are the salient features and benefits of HDFC Life pension guaranteed plan:
What is interest rate arbitrage?
The interest rate applicable on your pension plan will be fixed at the time of its enrolment, irrespective of its rise or fall during the subsequent years of your policy term. The interest rate is determined by your insurer and the prevailing market rates. This can affect you and your insurer in two ways. If the interest rate arbitrage increases, your insurer will continue to offer you returns as per the same interest rate on the date of enrolment of your pension plan. That means a loss for you and profit for insurer. In case the interest rate arbitrage falls, the rate that will be offered to you will remain constant, hence, resulting in a profit for you and loss for your insurer.
What is LIC Pension Plus plan?
The salient features and benefits of LIC Pension Plus plan are:
What is NPS of Government of India?
The National Pension Scheme (NPS) is a pension plan that acts as a stable source of monthly income after retirement. Employers deduct a small amount from the monthly salaries of their employees and contribute the same towards their individual NPS accounts. The amount accumulated throughout the tenure is paid in instalments to the employee after retirement. For Central and State Government employees, the applicable deduction from their monthly income is 10%. An equal contribution is made from the government as well.
What is vesting age in pension plans?
Vesting age refers to the age at which policyholders start enjoying the returns of their insurance-cum-pension plan.
Where should I invest after retirement?
The following are some effective options that you can consider after retirement:
Which is the best LIC pension plan?
Jeevan Akshay is often considered to be the best pension plan from LIC.
Which is the best pension plan in India in the year 2019?
LIC’s Jeevan Akshay is usually rated as the best pension plan from LIC.
Which is the best pension plan?
The best pension plan in India is believed to be LIC Jeevan Akshay.
Which pension scheme is best in India?
Which retirement plan is usually considered to be the best?
The best retirement plan in India is believed to be LIC Jeevan Akshay.
Who is eligible for NPS?
Any individual, irrespective of whether he/she is an Indian citizen or a Non-Resident Indian, is eligible for opening an NPS account on meeting these criteria:
Why is it necessary to have a pension plan?
A pension plan enables individuals to financially plan for their post retirement years while they are gainfully employed. That way, they can make the best of its benefits for sustaining their usual lifestyle after their retirement.
What is Participating and Non-Participating Pension Plan?
A Participating Pension Plan, also known as with-profit policy, offers policyholders a share in the profits of their insurer in the form of dividends or bonuses. These dividends and bonuses are payable annually. However, these are not guaranteed as it is determined by the performance of the insurance company in that financial year. In comparison, the profits made by the insurance company is not shared with the policyholders in the case of Non-participating Pension Plans, also called without-profit or non-par policy. Since there are no dividends or bonuses involved, the premiums are also comparatively less.
What is PM Pension Scheme?
Prime Minister Pension Scheme, also known as Atal Pension Yojana, is a government-backed pension scheme that is particularly tailor-made for senior citizens. It offers financial security and guarantees maximum returns.
What is New Pension Scheme and its benefits?
New Pension Scheme (NPS) under the National Pension Scheme (NPS) enables individuals to invest in equity and debt market, according to their preference. Further, it also offers them the benefit of withdrawing 60% of the amount at the time of retirement and the remaining 40% can be used to buy annuity.