Pension and Retirement Plans in India

What Are Pension and Retirement Plans?

Pension and retirement plans are investment products that work as tools for generating wealth for your retirement. These retirement plans are designed to protect you from inflation and economic uncertainty so that you dont have to face the risk of outliving your savings. A smartly chosen pension plan helps you cover expenses after retirement, including living costs, medical bills, and funds for pursuing your hobbies, among other things. You can choose from various pension plans in India, like the NPS (regulated by Pension Fund Regulatory & Development Authority) and private plans (offered by insurance companies). Depending on what kind of an investor you are (risk-taking or risk-averse), you can either invest in market-linked pension plans or guaranteed return plans.

ULIP-based pension plans offer market-linked returns suitable for long-term accumulation. Guaranteed return plans are more suitable for risk-averse investors. With disciplined investments, you can build a corpus for your retirement expenses. And when you are closer to your retirement age, you can convert this corpus to lifetime income through a suitable annuity plan.

Why Should You Plan for Retirement?

Planning for retirement early helps you live your golden years with comfort, dignity, and peace of mind. You must prioritize retirement planning so that you can approach retirement with peace of mind, knowing that youve ensured financial stability. Here are some of the factors that make the case for retirement planning stronger.

1. Living Costs After Retirement

   The best retirement plan helps you build the corpus that you can use after retirement as a source of regular income. Even after retirement, you would like to maintain the lifestyle that youve adopted throughout your life. Retirement should not force you to give up things that are important to you. You can choose options like a lifetime-income annuity plan to keep your finances smooth during the golden years.

2. Covering Medical Bills

   Your healthcare needs would most likely increase as you age. Add to that the higher medical inflation and you have a future where medical costs can rise faster than your savings. By investing in one of the best pension plans, you will protect yourself from dealing with such financial situations.

3. Preparing for Uncertainties

   A well-though-out retirement plan protects you from uncertainties like an economic downturn, a pandemic, or a job loss. It helps you lead your life with peace of mind in a global economy constantly in a flux due to facts like war between countries and public health risks like a pandemic.

4. Rise in Nuclear Families

   With the old way of living with our extended families becoming less and less commonplace, ensuring financial independence in our later years has become even more important. As our society moves toward more urban and nuclear-family arrangements, planning for retirement is more crucial than ever.

5. Insufficient Social Security

   Unfortunately, countries like ours still dont have the desired social security. That means you need to plan ahead and secure a steady income for yourself after you stop working. The best retirement plan in India helps you fill this gap by giving you a guaranteed source of income for your retirement years.

6. Living Your Dream Retirement

   If you wish to lead a life of leisure and joy after retirement, a retirement plan lets you create the financial freedom to live those dreams. Whether it's pursuing your hobbies or spending time with loved ones, a pension plan lets you focus on what truly matters.

How Much Corpus Do You Need to Retire in India?

When it comes to buying a pension plan, finding an estimated corpus amount is crucial. This retirement fund varies from person to person and depends heavily on factors such as your retirement lifestyle, current age, and healthcare needs, among others. Here are things you need to keep on top of your mind while estimating how much you would need for retiring in India.

• Your Lifestyle: How much corpus you need to build depends on your current lifestyle and the kind of post-retirement lifestyle you want to live.
• Inflation Rate: With an average inflation rate of 5 to 6%, your expenses will most likely double in every 12 to 14 years. So when you calculate the retirement corpus, keep in mind that you are saving for future expenses that are much higher than today.
• Current age and retirement age: Theres this iron rule about retirement planning: the earlier you start, the better. Its due to the central role compounding plays in growing your money. If you start in your early 30s, for example, you get more benefits of the power of compounding, versus, say, if you start in your late 40s.
• Medical care costs: Your medical bills will only increase as you get older, which means you have to spend much more on healthcare than you are doing today. Since healthcare cost is something you cannot adjust or cut back, you need to factor this in while estimating your retirement corpus.
• Major life events: For most people life events like kids education and marriage usually occur before their retirement. If you dont factor these likely events in, you risk these future expenses eating into your retirement savings and investments.
• Returns on investments: And finally, all the above factors rely on how much ROI you get from your investments. By thorough research and comparison of the best pension plans in India, you should choose a product that ensures high returns while meeting your unique needs.

Following are the details of the best pension plans by insurance companies:

How Do Pension Plans Work?

Pension plans work by accumulating your money over the investment period. This period is known as the accumulation phase, since your money builds up the retirement corpus. And at the end of the accumulation phase, when you reach retirement, you can start withdrawing this fund as regular income or as a lump sum. The second stage is known as the vesting phase, as youre now eligible to withdraw your accumulated fund.

Lets explore the workings of a pension plan using the example of a private pension plan.

Private Pension Plans

You can buy a ULIP-based pension plan through one of several flexible premium payment options. You could choose from monthly, half-yearly, or annual premium options and decide your accumulation phase. At maturity, you can withdraw 60% of your total corpus as a lump sum. The remaining 40% of the corpus will be available as lifetime monthly pension payments. Heres how it works:

1. Accumulation Phase

   You pay premiums as per your preferred payment mode, like monthly, yearly, or a single lump sum. During the accumulation phase, the insurance company invests your money for long-term growth. Growth may come from guaranteed or market-linked returns, depending on the kind of Indian pension plan you select.

2. Vesting Age

   At vesting age, you start receiving your pension amount. For retirement plans in India, vesting age usually ranges from 40 to 70 years. Vesting age means your accumulation phase has ended and the corpus is now available for withdrawal. It marks the start of your retirement income.

How Your Retirement Income Works

When you reach the vesting age, a portion of your corpus becomes available for withdrawal immediately. The other part is reinvested to fund your retirement income. You can think of this procedure as splitting your larger fund into two funds to give you financial stability and guaranteed lifetime income.

• 60% Lump sum withdrawal: This portion is now available as a lump-sum payout, which you can use to meet major expenses at retirement.
• 40% Invested in annuity: The remaining part of your pension plan is invested in annuity. It converts your retirement savings into a guaranteed lifelong pension. You can choose to receive this pension at your convenience, with options for monthly, yearly, or quarterly payments.

Lets understand how a pension plan in India works with the example of Raghu, a 40-year-old working professional. Raghu plans to buy a ULIP-based pension plan as part of his retirement planning. The following illustration shows how he can build a retirement corpus:

• Raghus age at pension plan purchase: 40 years
• Investment tenure: 10 years
• Investment amount: ₹20,000 per month
• Total amount invested: ₹20,000 × 12 × 10 = ₹24,00,000
• Lock-in period: until Raghu turns 60
• Total corpus at age 60: ₹2.13 crore

Corpus Utilisation at Retirement:

• 60% lump sum (₹2.13 crore) = ₹1.28 crore (tax-free)
• 40% annuity purchase = ₹85.2 lakh to be invested in an annuity plan

With the annuity plan, Raghu may receive a pension of around ₹6.3 lakh per year (taxable as per his income tax slab).

In the event of Raghus untimely demise, the nominee will receive the entire annuity amount (₹85.2 lakh) as a tax-free lump sum.

Your Retirement Income

Once the annuity purchase is done, the plan starts paying out pensions as per the option you selected. These options include lifetime monthly income and joint-life income (continues for spouses after your death).

What Is an Annuity?

Annuity plans are savings products that help you secure your retirement by providing a guaranteed lifelong pension and life cover to financially protect your loved ones. Technically, an annuity plan is an insurance contract where the insurance company promises you regular income after retirement, giving you a financial safety net. A customer who buys an annuity plan is called an annuitant. As an annuitant, you can choose to pay for the plan either through a lump sum or regular premiums.

Types of Annuity Plans

Annuity plans are categorized in several ways, including based on payout options, payout duration, and beneficiaries of the plan. If you need income immediately after investing, you can choose immediate annuity plans, whereas deferred annuities are plans where payout begins after a defined accumulation period. Below are the most popular categories of annuity plans.

1. Single Life Annuity

   A single life annuity plan covers only one individual, the annuitant. Payments are guaranteed to last for the annuitants entire life. This type usually offers the highest initial income rate.

2. Joint Life Annuity

   Joint life annuities protect two people, often the annuitant and their spouse. The income continues as long as either person is still alive. The payment amount might decrease after the first death.

3. Return of Purchase Price (ROP) Annuity

   An ROP plan comes with a capital guarantee feature. You receive regular, assured income for your whole life. After the annuitant passes away, the plan ends. Your nominee will then receive the original purchase price back.

How Annuity Plans Work

An annuity plan works in two well-defined stages: accumulation phase and payout (or vesting) phase.

• Accumulation Phase: In this phase you build your corpus, especially in a deferred annuity plan. You invest a lump sum or make regular premium payments into the plan. This money grows over time, benefiting from compounding interest. This growth is generally tax-deferred until you start receiving income. The accumulation phase lasts until you choose to activate your pension, which marks the vesting phase.
• Payout Phase: You start getting your income in the vesting phase. The insurance company converts your accumulated corpus into guaranteed income. They start sending you regular payments, known as the annuity income. You choose how long these payments last. This could be a fixed number of years or your entire life, as in lifetime income annuity plans.

Types of Pension Plans in India

Saving for your retirement is a major financial decision and you should always research thoroughly to find the best retirement plan in India. Comparing government pension schemes, like NPS, and insurance-based plans will give you helpful insights. Here are details about what the different types of pension plans offer.

Key Features of Retirement Plans in India

Understanding the key features of a retirement plan is essential, as these advantages help ensure financial security, regular income, and a stress-free life after retirement:

• Sum Assured: The best pension plans are the ones that ensure financial protection through guaranteed payout. It could be either at the time of maturity or to the nominee upon the untimely demise of the policyholder during the policy tenure. The amount is decided at the time of buying the plan.
• Tax Benefits: Premiums paid qualify for tax deductions under Sections 80C and 80CCD(1B), and maturity proceeds can avail of tax exemption under Section 10(10D).
• Lifelong Income: You can also include an annuity in your retirement plan. In an annuity plan you pay once or over time, and in return, you get a steady income for a few years or even for the rest of your life. You can choose from immediate annuity and deferred annuity options based on your income needs.
• Surrender Value: The surrender value of a retirement plan is the amount the insurance company will pay you if you terminate the policy before maturity. This amount receivable is low compared to the maturity amount, and hence, it is advisable not to surrender the policy.
• Flexibility in Payment: The best pension plans provide various options for premium payment (lump sum or periodic) and annuity payouts (monthly, quarterly, or annually).
• Risk Coverage: When choosing a retirement plan, you can go with market-linked ULIPs or guaranteed return plans based on your risk profile. While ULIPs offer higher returns over a long investment period, traditional plans protect you from market volatility.

Eligibility Criteria for Pension Plans

If you are 18 years old or older, most insurance companies have a pension plan for you. Along with the entry age, you should also know the premium payment terms and the vesting age before buying a pension plan in India.

• Entry Age:
  In most cases, the minimum age for a retirement plan is 18 years, but some plans require an entry age of 30 years. The maximum entry age is usually around 75 years.
• Premium:
  Premiums, in general, are the regular amounts paid throughout the policy period by the policyholder. The premium amount and payment frequency depend on the specific pension plan you choose.
• Vesting Age:
  Vesting age is the age at which you begin receiving your pension. Its usually set at 40 years but can vary depending on the retirement plan and insurance provider.

Who Should Buy a Pension Plan?

Virtually every earning individual should consider investing in a pension plan. Planning for retirement is crucial to your financial security, whether you are a young professional, self-employed, or in senior management.

1. Young Professionals:

   Start early to benefit from compounding interest and build a secure retirement fund.

   Example: A 25-year-old begins a pension plan with a modest monthly premium. Over 35-40 years, the accumulated corpus grows substantially, providing a comfortable monthly pension after retirement.

2. Self-Employed Individuals:

   control of your retirement savings, as there are no employer-sponsored plans available.

   Example: A freelance consultant invests in a pension plan, making flexible premium payments. Upon retirement, they receive a steady monthly pension, ensuring financial independence.

3. Employees Without Pension Benefits:

   Don't rely solely on government schemes; secure your retirement with your own pension plan.

   Example: An employee in a private company without a pension scheme starts a pension plan to build a retirement corpus, ensuring a monthly pension after retirement.

4. Those with Irregular Income:

   Ensure financial stability in your non-earning years by building a reliable corpus.

   Example: A small business owner with irregular cash flow invests in a pension plan, paying premiums when income is good, and still secures guaranteed pension benefits later.

5. People Aiming for FIRE (Financial Independence, Retire Early):

   Plan your early retirement; follow the trending FIRE retirement path.

   Example: A professional in their early 30s, aiming to retire by 45, channels a significant portion of their income into a pension plan. By the time they reach their FIRE target, they have built a sizable corpus that provides a steady pension, allowing them to cover living expenses and enjoy financial freedom decades before the standard retirement age.

6. Anyone Planning for Inflation-Protected Income:

   Protect yourself against rising costs of living with plans offering increasing annuities.

   Example: A retiree opts for a pension plan with a built-in inflation rider, ensuring their monthly pension increases by a fixed percentage every year to match rising living costs.

7. Individuals Seeking Tax Benefits:

   Maximize tax savings under Section 80C and Section 10(10D).

   Example: A salaried individual invests in a pension plan and claims a deduction of up to ₹1.5 lakh under Section 80C every year, effectively lowering their tax liability while securing a pension for the future.

When Is the Right Time to Start Retirement Planning?

The right time to start retirement planning is now! Although that might sound like a cliche, the earlier you start, the better the chances of building a desired corpus. Having said that, you should also understand that at what life stage you plan for your retirement greatly impacts the outcomes. Below is an overview of how retirement planning works for different age groups.

Tax Benefits on Pension and Retirement Plans in India

Tax benefits make pension plans highly attractive in India. Investing in these plans helps you save for your future while reducing your current tax liability. Here are the key tax advantages:

• Section 80C: Section 80C benefits cover premiums paid toward retirement savings that qualify for a tax deduction. You can claim up to 1.5 lakh in a financial year.
• Section 80CCC: Under 80CCC This applies to contributions made to specific annuity pension funds. The deduction limit is part of the overall 1.5 lakh ceiling.
• Tax-Free Maturity: Up to 60% of the corpus received at maturity can be withdrawn tax-free (usually under Section 10(10A)). The remaining amount must be used to purchase an annuity.
• Taxable Annuity Income: The regular pension income you receive after retirement is taxable. It is added to your income and taxed per your slab rate.

Factors to Consider Before Buying a Pension Plan

Consider the following factors before buying a pension plan:

• Retirement Age and Goals: Determine your desired retirement age and lifestyle you want post-retirement.
• Financial Needs: Assess future expenses like healthcare, inflation, and daily living costs to estimate your required retirement corpus.
• Plan Type: Choose between traditional pension plans, market-linked plans (ULIPs), or annuity-based plans based on your risk appetite.
• Premium Affordability: Ensure the premium amount fits within your current budget.
• Tax Benefits: Evaluate tax deductions on premiums and exemptions on maturity.
• Annuity Options: Check for flexibility in annuity payouts—lump sum, monthly, or increasing annuities to combat inflation.
• Life Cover: Look for plans that provide life insurance coverage along with retirement benefits.
• Flexibility and Add-Ons: Opt for plans that offer withdrawal options, top-ups, or riders for critical illness or disability.
• Plan Performance: Analyze historical returns for market-linked plans and the financial strength of the insurer.
• Loan Facility: Check if the plan allows borrowing against the policy in case of emergencies.
• Inflation Adjustments: Ensure the plan offers features to keep up with rising costs, such as increasing annuities.
• Current Debts and Loans: Consider your current debts and loans and plan to minimize or eliminate them before retirement to avoid financial burdens in your post-retirement years.

Charges Applicable in Pension Plans

Buying a pension plan may involve some charges, like fund management charges and fund switching charges. You can also consider adding riders to make your plan more beneficial.

1. Fund Switching Charges

   ULIP plans usually allow you to switch between different investment funds based on their changing investment preferences or market conditions. Usually, a minimum of two and a maximum of unlimited free switches are allowed each year, based on the selected product's terms and conditions. However, subsequent switches may incur charges.

2. Add-ons/Riders

   ULIP-based pension plans offer additional riders or add-ons for enhanced coverage and additional benefits. You can choose from common riders, including accidental death benefit, critical illness rider, disability rider, and waiver of premium rider. These riders come at an extra cost.

3. Other Charges Associated with ULIPs

   ULIP-based retirement plans have various charges, such as fund management charges, premium allocation charges, policy administration charges, mortality charges, and surrender charges. These charges are usually minuscule and dont affect your return in the long run.

How to Calculate Returns on Pension Plans?

For calculating returns on pension plans and how much you need to invest, you need to consider your current age, the desired retirement age, current income, and monthly expenses. Then you need to factor in annual inflation and your expected returns on investments.

Lets understand this with the example of Priyanshu, a 40-year-old IT professional, who wants to retire at 60.

How Much Priyanshu Needs to Retire

• Age: 40
• Annual income: ₹25 lakh
• Current monthly expenses: ₹120,000
• Planned retirement age: 60 (20 years until retirement)
• Assumed inflation rate: 6% per year
• Expected return on investments: 11% per year

Step 1: Estimate monthly expenses at retirement

The formula for calculating the future value is: Future Value = Present Value × (1 + inflation rate) raised to the power of n.

Here:

• Present value = ₹1,20,000 per month
• Inflation = 6%
• n = 20 years

Future monthly expenses at 60: ₹1,20,000 × (1.06)²⁰ ≈ ₹3,85,000 per month

Annual expenses at retirement: ₹3,85,000 × 12 ≈ ₹46.2 lakh per year

Step 2: Calculate the required retirement corpus.

A widely used approach is the 4% rule, which assumes that Priyanshu can withdraw 4% of his retirement corpus every year (adjusted for inflation) without running out of money.

Required corpus = Annual expenses ÷ 4%

= ₹46.2 lakh ÷ 0.04
≈ ₹11.55 crore

Priyanshu will need a retirement corpus of approx. ₹11.6 crore at age 60. Therefore, he needs to save and invest in retirement plans while keeping this number as the target. Please note that the corpus will vary based on the assumed rate of return (which is 11% in this case).

Retirement & Pension Calculator

Use the retirement and pension calculator to estimate how much you need to invest monthly, quarterly, or annually. You need to input details like your age, current monthly expenses, and your desired retirement age.

Steps to Buy a Retirement Plan Online

Step 1: Check and compare retirement plans on Policybazaar.

Step 2: Understand the features and premiums of different plans to find the best fit for you.

Step 3: Choose the most suitable plan that aligns with your goals and needs, like your retirement lifestyle and hobbies you want to pursue.

Step 4: Consider adding riders to enhance and customer your pension plan features or adjusting coverage if needed to modify the plan according to your situation.

Step 5: Make your payment online and receive confirmation about your retirement plan.

Documents Required for Buying Pension Plans

Below is a list of documents needed to buy a pension plan.

1. Proof of Identity (POI)

   • PAN Card is mandatory for all transactions.
   • You can also use your Passport or Voter's ID.
   • A valid Aadhaar Card copy works as well.

2. Proof of Address (POA)

   • You must submit documents showing your current address.
   • A valid Aadhaar Card copy is commonly accepted.
   • Your Passport or Drivers License works too.
   • You can also use recent utility bills, like electricity or gas.

3. Proof of Age

   • This confirms your date of birth.
   • The insurance company requires accurate age proof.
   • You can use your Passport or Birth Certificate.
   • A School Leaving Certificate is also acceptable.

4. Bank Details

   • A cancelled cheque leaf is needed for bank proof.
   • This links your bank account for premium payment.
   • It also ensures your future annuity payout is correct.
   • Provide a recent bank statement or passbook copy.

5. Other Documents

   • The fully completed and signed proposal form.
   • One or two recent passport-size photographs.
   • Specific medical reports, if requested by the insurer.

Pension Plans vs PPF vs NPS vs Saral Pension Scheme

Why Buy a Pension Plan from Policybazaar?

Policybazaar offers you certain facilities that ease out your experience in purchasing a pension plan. Here are some of the key benefits of buying your retirement plans from Policybazaar.

• Options to Choose from Top Plans You can compare multiple pension plans from top insurers on a single platform.
• Seamless Comparison & Purchase Policybazaar allows you to compare features, benefits, and premiums of different plans to make an informed decision.
• Customizable Plans Find plans customized to your retirement goals, budget, and financial needs.
• Transparent Process No hidden charges; all details are clearly presented before purchase.
• Expert Assistance Get guidance from financial advisors to choose the best retirement plan.

• 24/7 Customer Support Round-the-clock assistance for queries, claim processes, and policy management.

Common Mistakes to Avoid in Retirement Planning

While planning for retirement, you need to be careful about avoiding a few pitfalls. Whether its not starting your retirement plan early enough or not understanding future expenses, these mistakes, if not avoided, will affect your plan.

• Starting Your Retirement Planning Late: If you wait too long to plan for retirement, you won't be able to build up a strong corpus. If you start early, your assets will have more time to grow through compounding.
• Not considering medical bills & emergencies: As you become older, medical costs tend to go up. Not preparing for health-related costs or emergencies can put a strain on your finances that you didn't foresee.
• Not accounting for future costs and inflation: Many people don't know how much money they'll need after they retire. If you don't plan for rising costs and inflation, they can swiftly eat away at your funds.
• Investing in limited categories of financial instruments: Putting all your money into one form of investment makes it riskier. Diversifying your investments will help them stay stable and expand over time.
• Not reviewing and adjusting the plan periodically: You need to change your retirement plan from time to time. You need to reassess your plans regularly to stay on track because life changes and the market changes.

Conclusion

Investing in a pension plan is a crucial decision for ensuring your financial security and peace of mind. To find the best retirement plan in India, you must compare multiple plans. While you are at it, check expected returns, premium amount, and payout options to select the right plan. You can use an online pension calculator to estimate the investment amount and the expected value of the retirement corpus. Finally, you could talk to an expert and ask for a quote as per your requirements. And now you are ready to decide which pension plan you should buy!