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All about retirement plans (and saving tax on them)

Jan 04, 2018 | 2 years ago | Read Time: 3 minutes | By iKnowledge Team

Thinking about your future? Here are ways to save on tax and build a big retirement corpus.

Every day you come across people advising you to start planning for retirement. But then, you don’t see the point of it, do you? After all, retirement is decades away from becoming a reality. So why bother about it.

But, has it ever occurred to you that early planning will help save a lot of money for your retirement years. A phase of life when the monthly salary that you draw now will be but a wistful memory.

So, why not start thinking about your future and find ways to reduce your tax so that your retirement corpus is even larger.

Try to get a retirement plan

 The first thing that may come to your mind is to save money over, say, 30 years. You think your savings would suffice in your old age. But that doesn’t usually work. You may find yourself in emergencies wherein you are forced to dip into your savings. Plus, the amount you save might not be sufficient for your second innings. Inflation and your lifespan are the biggest reasons that can throw your retirement calculation out of the ballpark.

This is why retirement plans—also known as annuity plans—are popular. Such plans provide you with smart ways to generate post-retirement income.

For retirement plans, begin by assessing your employer’s pension fund. Job security is no longer a guarantee, of course. So, it helps to have your own fall-back plan in place.

Look at the different retirement plans offered by insurance companies, the government and other institutions. With these, you are free to choose the pay-out dates, and can start receiving a pension even before you retire.

Choose your retirement plan wisely

There is no single retirement product. That’s because people have different needs. So, here is a quick sampling of different retirement plans available in the market:

  • Immediate annuity

A one-time lump sum investment is all it takes. Try immediate annuity plans like Aegon Life’s Insta Pension Plan. This plan guarantees you a pension for the rest of your life. In this case, you start getting pension with immediate effect. But the return may vary depending on how much you invest and for how long. You can receive your pay-outs monthly, quarterly, half-yearly or yearly. The choice is yours.

  • Deferred annuity

Here, you make a payment now for a pension that will be paid in future. You can decide when you wish to start receiving the pay-outs. Deferred annuity plans tend to be of two types:

  1. Traditional retirement plan

This type of plan mostly invests in low-risk products, such as government securities. Thus, your returns will be modest but secure.

  1. Unit-linked pension plan

Considering an early retirement plan? Go for a unit-linked pension plan, such as iInvest Plan. It can give you higher returns as they are linked to the markets. You also get to pick your own asset class.

  • Annuity certain

These plans pay you the annuity for a specific number of years. In the event of your untimely demise, your beneficiary receives the remaining annuity.

  • Life annuity

In this case, if you pass away, your spouse can receive a pension for life.

  • Guaranteed period annuity

This plan offers a guaranteed annuity for a fixed period. It could be five, 10, 15 or 20 years. Your nominees receive the annuity payment even if you don’t survive the policy period.  

  • National Pension Scheme (NPS)

NPS is a government-backed pension scheme. You can withdraw 60% of the fund value during retirement. Use the remaining 40% to buy an annuity of your choice.

Look out for tax breaks in your retirement plan

Mr Taneja retired last year. He receives a fixed rental income from a property that he owns. So, he still has to pay taxes as per the rules. Retirement has not offered him a tax-free income.

Therefore, merely ensuring savings for retirement is not enough. Select your pension plan so that it helps you save tax. Is your annuity plan giving you a sufficient tax benefit? Here is what you should know:

  • Section 80 CCC of the Income Tax Act offers tax exemption on income contributed towards pension. The maximum deduction available under this is Rs 1.5 lakh per annum.
  • Withdrawal of up to one-third from the pension fund is tax-free.
  • Note that the NPS maturity amount does not enjoy tax exemption. 

How do you choose the right pension plan?

Considering the number of annuity plans available, choosing the right one can be quite a task. So, here are a few pointers that can help you zero in on the right pension plan:

  • Understand what your exact need is.
  • Thorough research of the pension plan is a must.
  • Select a product that offers the income you need.
  • Consider other retirement planning options too.
  • Saving tax should play a major role in choosing a pension plan. But it is only one of many factors.

To sum up

Take the first step and assess different retirement plans. Focus on maintaining your lifestyle and maximising your tax benefits. The money you save can be put to good use in your post-retirement years. A good pension plan can ease your life after retirement.


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