What is a Pension or Retirement plan?

A pension plan is a scheme that has provisions for systematic saving plan during the working years of your life, only to be used later after retirement. Every month, a part of your income is set aside as savings that can be used once you retire. This is called the accumulation phase; the time when you buy a retirement plan, until the time of retirement.

How do Retirement Plans work?

You can contribute a part of the income to the retirement plan in the form of monthly premiums. The amount contributed is then invested in several instruments of the market. The investment yields profitable returns that you can bank upon after retirement. Once you have retired, the retirement plan starts paying you on monthly basis or lumpsum or both, however you have chosen to be paid from the accumulated corpus. This gives you the access to a monthly income that takes care of expenses in the post-employment years.

With the help of a retirement plan, you don’t have to be dependent on external sources of finances. Whatever be the needs or demands of a post-retirement lifestyle, a pension plan is designed to provide a sustainable way of living.

When should you start saving for a Retirement Plan?

You should start saving for retirement plans from an early age. One of the major advantages of planning early is to get a head-start on saving for your retirement. The earlier you begin, the more money you have upon retirement. Also, if you wish to retire at an early age, you can start saving accordingly at a predetermined stage of your earning phase.

It is as simple as saving for a rainy day. You may have a stable financial situation with your current employment. It may guarantee comfort and security for many years to come.  However, life is unpredictable. One should always be prepared to handle unforeseen situations. A pension plan works like a safety that protects you and your family from uncertainties.

The money you save now can be used to support your lifestyle even after the cessation of employment. After all, you deserve a rest from working all your adult life. A pension plan is a reward for years of work spent in providing a fruitful and comfortable life to your family. After retirement, it’s time for you to hang the boots and enjoy the benefits. This can only happen if you have the blueprint of a financial plan that assures you of monetary returns in your twilight years.

Why should you invest in a Retirement or Pension Plan?

Everyone requires a pension plan. It gives you the freedom to live with dignity and self-confidence to lead an independent life. A pension plan also serves as a tool to brace the impact of financial upheaval and uncertainties individuals may encounter during their lifetime. Therefore, retirement planning should commence during the early stages of earning.

  • Financial cushion for retirement

A retirement plan acts as a back-up for the post-employment period. You need financial resources to meet the requirements of daily expenditure after retirement.  Pension planning involves timely saving during your productive years. The savings transform into a corpus over time to be used for later years.

Investing in retirement plans involves patience. You must develop the habit of saving as early as possible. If you start saving in your early 20’s, the corpus thus generated remains at your disposal when you turn 60.

  • Fulfill your dreams

The corpus can then be used for several purposes like travelling, medical requirements and miscellaneous expenses. You may want to go on a world-tour or explore destinations never travelled.

Retirement planning follows the principle of accumulating a compound sum over the years. If you set aside a part of your income during your employment years, you don’t have to worry about finances in your later years. Since an individual is not expected to keep working beyond a certain age, the savings come handy after retirement.

  • Wealth creation

Pension plans are not just aimed at saving a sum for retirement. Another aspect of a retirement plan that attracts investors is its profit-building feature. Depending on your risk appetite, can choose from a variety of investment tools to make a profit. Also, depending upon the trend of the economy, one can take calculated risks and generate enough sum to last an entire lifetime.

Most of us opt for a retirement plan to protect our savings from future uncertainties. These could be in many different forms. One of the most impactful conditions is the rising cost of living and increasing inflation. With the rising prices of commodities and living conditions, one requires a fool-proof plan to lead a comfortable existence. A retirement plan helps you live the life of your dreams without compromising on your goals.

  • Emergency fund

A retirement plan also enables you to protect your loved ones and safeguard their interest. Especially during the time of an emergency, savings accumulated in a pension plan can be of great help. Also, consider the fact that it is not possible for you to be around your loved ones all the time. In such a situation, your savings and profits gained from decade-long investments will fulfil the needs of your family.

Advantages of a Pension Plan

Pension plans are instruments of long-term investments that yield long-term benefits. You need to invest a part of the income to reap the benefits during your post-retirement years.

There are several types of pension plans with varying degrees of benefits. Every plan has several features that would appeal to different customers. If you wish to invest in pension plans, it is prudent to have adequate information about rewards and benefits.

We list out some of the reasons why investing in pension plans is beneficial:

Assured income after retirement

In India, pension plans are designed to provide guaranteed income after retirement. This becomes necessary to meet daily expenses. Not just daily expenses, post-retirement income can be used to help you live the rest of your life with dignity. Some insurance plans provide income for the rest of an individual’s life. Policyholders can lead an independent life without worrying about the future. Often, customers opt for two pension plans, one for themselves and one for their spouse. It is a convenient way to bear the cost of expenses post-retirement. Since pension plans offer better returns over the years, customers are assured of a stable financial future. Policyholders can understand the benefits of several different schemes before selecting an appropriate pension plan. It also gives them the freedom to customize the features according to their risk-taking abilities.

Easy availability of money

Customers can choose plans that offer lump sum payment upon maturity. A lump sum payment can be used to meet larger expenses during the later stages of life. Be it building a home, undergoing medical procedures, expenditure of travel and leisure, a lumpsum payment is beneficial in different circumstances. Hence, it is recommended that customers compare different plans and choose the one with the required benefits.

Save on Taxes

A major advantage of investing in a retirement plan is the money you save on taxes. There are several exemptions under section 80C which policyholders can take advantage of. The sum you invest in pension plan remains free from tax. By careful planning, you can reduce the amount you pay in taxes. This can help you become a part of a lower income tax slab.  If your aim is to create a corpus that helps you in the future, you will have to inspect all the elements of several pension plans.

4.Insurance Cover

Some retirement plans also come with an insurance cover. An Insurance cover protects your family against unfortunate circumstances. Most customers opt for an insurance cover with their retirement plans as it assures the financial stability of their family. It is an excellent way of providing an income for your family even in your absence.

Types of Pension Plans you should know of

Pension plans are classified into different types based on features and benefits they offer. They are listed as follows:

Deferred Annuity

A deferred annuity pension plan helps you to accumulate a corpus over a period. You can pay premiums regularly or a single premium during the term of the policy. In such a plan, you can enjoy the benefits of pension as when the policy term gets over. One of the advantages of a deferred annuity is the tax-free investment during the policy term. The tax will be levied only on withdrawals after the cessation of the policy period.

Since the deferred pension plans come with the customization of regular payment of premiums or payment of a single premium, you can opt for the plan depending upon their comfort and necessities.

Immediate Annuity

Under the immediate annuity scheme, policyholders receive pension immediately. You can deposit a lump-sum amount which is then used for several investment programmes. Also, the premium paid by a policyholder is exempted from taxation, as per the Income Tax Act,1961.

Cover or No-Cover

Pension plans come with features of with or without life-cover. You can opt for a plan with an inbuilt life cover feature can be assured of compensation paid by the organization to the family members of the insured individual. For plans devoid of a life-cover, your nominee gets the corpus generated so far, upon the unfortunate death of the insured.

Fixed-period Annuity

You can determine the years for which the pension is to be paid.

Life Annuity

A life annuity assures the policyholder of pension until the time of his/her death. You can also opt for the ‘with spouse’ feature which entails payment of pension to the spouse after the death of the annuitant.

Guaranteed Annuity

A guaranteed annuity allows you to decide the tenure for which they would like to receive their pension. You can choose 5 years, 10 years, 15 years or 20 years as the term period for the annuity after retirement.

National Pension Scheme (NPS)

As per the scheme, you can set aside a part of your income and deposit it in the National Pension Scheme. The amount will then be invested in either equity or debt market as per your choice. One of the advantages of the NPS is customers can withdraw 60% of the corpus at the time of retirement. The remaining 40% will be paid to the policyholder as the annuity.

Pension Funds

You also have the option to invest in pension funds. Pension funds are a good choice, if you can invest over a long period leading to more benefits upon maturity. Pension Fund Regulatory and Development Authority (PFRDA) has authorized 6 selected companies to manage pension funds.

Highlights of a Pension Plan

Pension plans help you plan for the long run. They provide the freedom to live an independent, dignified life after retirement. Here are some of the features of a pension plan.

  • Offers Annuity

An annuity is one of the most important features of a pension plan. There are two variants of annuity, immediate and deferred. An immediate annuity is an option where the pension starts immediately. Policyholders must pay lump sum amount as premium which is then used by the insurance company to invest in various schemes. Because the policyholder has paid a lump sum amount as a single premium, the company starts paying annuity immediately. The objective is to build a corpus for the annuitant over the years.

In the deferred annuity plan, you start receiving annuity after a certain period. You are offered various investment options with an option of choosing the number of years they wish to receive the annuity.

You can customize the plan to suit their needs and avail the benefits of long-term investment.

  • Gives a Sum Assured

Sum Assured is the amount received as life insurance coverage by the insured during the term of the policy. The sum assured generally comes as a part of the ‘with cover’ pension plan. You can use this benefit to meet their everyday expenses and provide support to their dependents. It also enables the insured to handle situations that would otherwise lead to financial instability.

Sum Assured can be calculated in several ways. Companies often calculate the amount with the help of different parameters. Your sum assured could be 10 times the amount you would pay as premiums. It can also be the total fund value of the policy. These calculations differ from company to company.

  • Plan for your vestige age

Vestige age is the time when you start receiving the pension amount. You can decide whether to receive the pension immediately or after a defined period. For instance, if you opt for an immediate annuity, you may start receiving the pension amount immediately after the payment of the lump sum amount as premium. With a deferred annuity, you can choose a specific time after which they would receive the pension amount. For most policies, the minimum vestige age is 40 years, with the average being 50 years. The maximum vestige age is set at 70 years, though some companies may keep it at 65 or even 79 years.

  • Builds corpus during accumulation period

The accumulation period is the time frame for which you pay premiums before receiving the pension. You have the option to receive a part of the premium as pay-out right in the initial years of the policy. The advantage comes in the form of a decrease in cash outflow at the beginning of the policy term. You then have the security and freedom to use the amount to address immediate concerns.

Most companies often segregate pay-out and the accumulation period. This helps in building a large corpus for you over time.

  • Start receiving money during payment period

The payment period is the time in the tenure of the policy at which the policyholder starts receiving the pension. The payment period is kept separate from the accumulation period in most policies. This helps you to enjoy the benefits of a sufficient corpus accumulated over a period.

  • Get surrender value

The feature helps you estimate the amount received upon the surrender of the policy before completion of the term. For the feature to take effect, you must pay premiums up to a minimum period.

Individuals may wish to discontinue a plan for various reasons. One may not be able to continue premium payments or may need the money to handle an unforeseen situation. Considering the advantages of a pension plan, experts suggest that a policy should not be discontinued. Once the insured party decides to surrender a plan, they cannot avail benefits and the life cover provided by the plan.

  • Get minimum guaranteed amount

Minimum guarantee of pension plans shows you the minimum amount you will receive at the end of the policy term.

As instructed by the IRDAI, it is compulsory to have ‘on zero returns’ for maturity benefits and the premium paid by the policyholder. Thus, the minimum guarantee feature must be a part of every pension plan. It is advised that the minimum guarantee of pension plans should be at least one percent of the premiums paid over the years.

Minimum guarantee is applicable to all forms of insurance plans. However, you can choose from a variety of insurance plans that offer better returns than a guaranteed plan. Since benefits vary from plan to plan, it is important you consider all the factors before opting for an insurance plan.


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