Retirement is the time when you would like to spend your days doing what you love — travel, live in a farm house, start a poultry farm, restaurant etc or just relax. However, we also come across many people who are not very comfortable about retirement; they get worried on thinking that their regular income will then become irregular. Everyone has to retire at some point from their working lives. Everyone has plans on how they will live their lives to the fullest then! We all know of inflation and how it affects our expenses with each passing year. Every great retirement dream has a cost attached to it; you know there won't be regular income and expenses will continue to rise. Hence, it becomes imperative that we start saving systematically to enjoy our retired life to the fullest.
If we look around, most working people in India do not plan their savings towards retirement and believe that their current savings will be enough to take care of their retirement needs. In earlier times, there were joint family systems. People used to spend their retired life with the members of their family. They did not worry about managing their livelihood during retired life. But the situation is changing very fast now, especially in the cities where there is an increasing trend of nuclear families and as a modern individual, would you not like to maintain your financial independence post retirement?
Also, as average life spans are increasing in India, the retirement years are likely to be longer and inflation will also remain an important factor. Post retirement, you need regular income to ensure that your expenses can be met. Moreover, unlike in developed countries, there is no social security system in our country. So it is crucial for us to realise that only through a systematic retirement plan can we maintain the standard post-retirement lifestyle. Retirement planning is an important aspect of planning your savings.
A good retirement plan can help you live an independent life even when you retire. One of the best ways to plan your retirement is to invest in pension plans provided by life insurance companies. During an individual’s working life it is possible to buy a retirement insurance plan, also known as a pension plan, to which small amounts can be contributed on a monthly/yearly basis. In this way, a lump sum can be accumulated by the time the individual reaches retirement age, which will provide a monthly income throughout retirement.
Pension Plans Basics
What are pension plans?
When an individual opts for a pension plan, he has to pay a fixed amount, known as the premium, to the insurance company, over a pre-determined period of time, known as the term of the policy. The premium will be invested by the insurance company in various instruments to earn returns and build a corpus over the term of the policy. The amount paid as premium is also eligible for tax benefits.
How do pension plans work?
At the time of opting for the pension plan, the policyholder defines his retirement age. At this age, typically, he will have an option to withdraw a part of the accumulated corpus as a lump sum payment and the rest will go into a pension plan (annuity plan) of his choice that will provide him steady income for the rest of his retirement period.
In other words, the policyholder can choose to invest the balance sum to obtain a monthly income for the rest of his life. The period over which he will receive the monthly income is known as the annuity period.
A pension plan is designed to generate regular income for individuals once they retire. Insurance companies offer various pension plans (also called as retirement plans or annuity plans) where a person has to initially invest either a lump sum amount or regular annual premiums over a period of time in return for regular income for life. In case of death during the policy term, the beneficiary gets the cover amount (sum assured) plus the bonuses/additions, if any.
Phases of payment
There are two phases in a pension plan:
Accumulation phase: During their working life the individual makes regular contributions or a lump sum contribution, which is invested by the insurance company on the client’s behalf.
Regular annuity phase: On retirement, the individual can use the fund accumulated during the accumulation phase to buy an annuity plan from the same insurance company. Apart from the accumulated fund the individual can also use the money received as part of retirement benefits such as provident fund money, gratuity, superannuation etc. or maturity money received from investments like a Public Provident Fund or from other investments to buy the annuity scheme. During the regular annuity phase the insurance company invests the lump sum amount on behalf of the individual and starts making regular/periodic payments to the individual.
Before receiving regular/periodic annuity payments, the individual can make a lump sum withdrawal. As per the current tax regulations, Insurance companies normally permit the individual to make withdrawals of up to a third of the accumulated fund. The remaining two thirds must be used to buy the annuity payments for the individual.
During the accumulation phase the individual can make contributions on a monthly/ quarterly/bi-annual/annual basis towards the retirement fund. An individual can also make a single lump sum investment towards the retirement fund. At the time of buying the annuity, individual can also choose to receive annuity payments monthly/quarterly/biannually/ annually. Most people choose the monthly annuity mode as it is in sync with their salary payments.