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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 planning your retirement, 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.
You are bound to get a balanced income after your retirement or based on how you invest. The guaranteed income shows how you are financially independent even after your retirement. It is also recommended to use a retirement calculator to get a rough estimation of how much money you may need after retirement.
You are entitled to get a tax exemption with your Pension plans under section 80C of the Income Tax Act, 1961. Besides, in case you want to contribute to the pension plans you get a huge tax respite under Chapter VI-A. Section 80C, 80CCC and 80CCD. For example, the NPS (National Pension Scheme) and Atal Pension Yojana (APY) are both subject to a tax deduction under section 80CCD of the Income Tax Act, 1961.
A Pension plan is essentially a low liquidity product. However, there are companies which offer pension funds where you can withdraw your pension amount at the time of accumulation stage. Thus, you will have funds especially at the time of emergency. Besides, you don’t have to rely on other people and banks to borrow a loan.
At this age you start receiving your monthly pension. In most of the cases, the minimum vesting age if 40-50 and is flexible up to 70 years. However, there are few companies who allow vesting age up to 90.
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 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.
This is the period when you receive your accumulated pension amount. For example, Ravi, receives pension from the age of 60 to 75. The payment period in Ravi’s case will be 15 years. Also, some funds will allow partial/full withdrawals during accumulation period, whereas some will keep this separate from accumulation period.
You may feel that surrendering pension plan before maturity maybe a smart move, but it is not (even after you have paid premiums). Reason being, the investor will eventually lose every benefit of the plan including the assured sum and life insurance cover.
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 retirement planning. 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.