Pension Plans

What is Pension Plan?

Pension plan or retirement plan are a type of investment plan, which helps you to accumulate a part of your savings over a long-term period so that you can have a secured financial future. Pension Plan helps you to deal with the uncertainties post-retirement and ensures a steady flow of income after retirement. Even if a person has a good amount of savings, a pension plan is nevertheless crucial.

A pension plan helps you to create a financial cushion in a long-term so that you can ensure to have a financially sound future after retirement. In a retirement plan, the insured needs to contribute a specific amount on a regular basis until the time of retirement. The accumulated amount is given back to the insured as pension or annuity at regular intervals of time. The pension plans not only secures the financial future of the individual after retirement but also help an individual to deal with the eventualities post-retirement.

Savings get exhausted very fast and are sometimes used in emergencies, thus it is very important to choose the best pension scheme so that you secure your cash flow for meeting basic daily needs post-retirement. When you continuously invest in a pension plan, the amount multiplies due to the benefit of the power of compounding, which makes a lot of difference to your final savings corpus. By choosing the right retirement plan, you can plan for retirement in a phased manner. So it is advisable to choose the best pension plan that can act as a savior in your golden years.

Best Pension Plans in India 2022

Types of Pension Plans in India

To cater to the requirement of the insurance seekers, there is a wide range of Pension Plans available in the market. These plans have multiple classifications, based on the plan structure and benefits. These pension plans can be further divided into 8 categories:

• Deferred Annuity 
• Immediate Annuity
• Annuity Certain
• With Cover and Without Cover Pension Plans
• Guaranteed Period Annuity
• Life Annuity
• National Pension Scheme(NPS)
• Pension Funds
• Whole Life ULIPs
• Defined Benefit
• Defined Contribution

Let’s explore these pension funds in detail:

• Deferred Annuity

  A deferred Pension Scheme allows you to accumulate a corpus through regular premium or single premium payment over a policy term. After the completion of the policy tenure, the pension is provided to the insured.  The deferred pension scheme offers various different benefits to the insured person. Moreover, it also offers the benefit of a tax exemption that is associated with the pension scheme. In a deferred pension plan, only 1/3^rd of the corpus is tax-free on withdrawal, whereas the 2/3^rd of the corpus is taxable. The amount invested in a deferred pension plan is locked and cannot be withdrawn for any emergency.

  A deferred pension scheme can be bought by paying one-time payment as well as paying regular premium payments. Therefore, these pension schemes are suitable for all types of investors, be it those who want to invest systematically and those who have a chunk of money to invest at one go.

• Immediate Annuity

  Under an immediate annuity scheme, the pension is provided immediately. The policyholder has to pay a lump-sum amount and pension will be provided instantly, based on the lump-sum amount paid by the policyholder. Under the immediate annuity pension scheme, the insured can choose from the range of annuity options. Moreover, the premiums paid are tax-exempted as per Income Tax Act, 1961. In an immediate annuity retirement plan, the nominee of the policy is entitled to receive the money in case of demise of the insured person during the tenure of the policy.

• With Cover and Without Cover Pension Plans

  With cover pension plans have life cover component in the plan. Upon the death of the policyholder, a lump sum amount is paid to the beneficiary of the policy. However, the cover amount is not very high since a large part of the premium is paid towards growing the corpus rather than covering for life risk.

  Under without cover pension plan, no life cover is offered to the insured person. In the event of unfortunate death of the insured person, the nominee will get the corpus (till the date of the death). Currently, deferred pension schemes come with the option of life cover, whereas immediate annuity plans do not offer the option of life cover.

• Annuity Certain

  Under this pension plan option, the annuity is paid to the annuitant for a specific number of years. The annuitant can choose the period and if they pass away before receiving all complete payment, the annuity will be paid to the beneficiary of the policy.

• Guaranteed Period Annuity

  Under guaranteed period annuity plan, the annuity is provided to the policyholder for certain periods like 5years, 10years, 15 years or 20 years, whether or not the insured survives that duration.

• Life Annuity

  Under the life annuity plan, the pension amount will be paid to the annuitant until death. After choosing the option of ‘with spouse’, the amount of pension will be given to the spouse of the policyholder, in case of the death of the policyholder.

• National Pension Scheme (NPS)

  New Pension Scheme was introduced by the government of India in order to secure the financial future of the individual after retirement. The policyholder can put savings in the New Pension Scheme. As per the preference of an individual, the money invested in the National Pension Scheme is put in equity and debt funds in order to generate returns on investment. The policyholder can withdraw 60% of the amount at retirement and rest 40% of the amount is used to purchase the annuity. The maturity proceeds are not tax-free.

• Pension Funds

  The pension fund is a type of pension scheme that remains in force for a long period. This pension plan offers a comparatively better return upon maturity. The Pension Fund Regulatory and Development Authority (PFRDA), the government body has allowed 6 companies as fund managers to manage Pension Funds.
  
  Besides, the pension funds provide better returns during the maturity period when one compares it to the other and remains active for a specified period. There are insurance providers that offer pension funds that are intended to empower policyholders to pull back your annuity sum at the hour of the aggregation stage. This component guarantees that are constantly arranged for an unexpected crisis, if it emerges. Above all, it keeps you from being reliant on banks for a loan under such circumstances.

• Whole Life ULIPs

  Under this option of the pension plan, the money stays invested for the whole life of the insured and upon retirement, he/she can make partial withdrawals and get tax free income. Additional withdrawals are allowed whenever needed or whenever necessary.

• Defined Benefit

  Defined benefit plans ensure that you pay a specific amount from the retirement income for life. It is decided on the premise of the pension amount, which is formulated keeping into account your earnings as well as for the number of years you have served with the employer. This essentially implies that in most of the plans not only you but also your employer can easily contribute. The responsibility of your employer is to contribute and guarantee there is sufficient cash to pay the prospective benefits for all the members within the plan. In case of lack of money required, it is to be duly noted that the difference must be paid by the employer.

• Defined Contribution

  When a defined contribution plan, the income of retirement is not guaranteed however the contributions are.  Within this plan, both you and your employer can easily contribute to the plan. Some of the contributions that you make may be matched by your employer. You are answerable for contributing all commitments to develop your investment funds. The sum accessible for your retirement relies upon the all-out contributions made to your record and the investment returns this cash earned. At retirement, you utilize the cash in your record to produce a retirement remuneration.

Comparison between Pension Plans

For the better understanding of our readers, here we have shown a tabular comparison of different pension schemes in India.

Features and Benefits of Retirement Pension Plans

In today’s day and age, people start planning for the retirement life at an early stage so that at the later stage they do not have to depend on others to make their ends meet.

In case you want to opt for a Pension Plan, ensure that the plan you choose has the following features:

• Annuity

  The annuity is the most distinctive feature of a pension plan and generally comes in two types, immediate annuity and deferred annuity. As the name suggests, immediate annuity starts immediately. The insurance company pays the pension plan annuity amount right after receiving the lump sum premium. Immediate annuity pension fund comes with the option of single premium payment so that the insurance company can use the amount invested by the policyholder to build up a corpus for him or her.

  The deferred annuity pension plan starts paying a certain sum after a few years. The insurance companies offer a diverse range of plan options for different terms that allow the policyholder to choose the period for which they want to receive the annuity.

  If you are looking forward to retirement planning, then, zero in on the best pension plan in India by keeping in mind the annuity offered by the pension scheme and the premium charged by the policy.

• Sum Assured

  The sum assured is a pre-defined amount offered to the insured during the tenure of the policy. The sum assured amount is generally offered as death or maturity benefit under with cover pension plan.  The sum assured amount is determined by the insurance companies in a different way. Under some pension scheme, the sum assured amount is determined as 10 times of the annual premium paid, while others may offer a sum assured that equals the fund value of the policy opted by the individual. In case, there is no sum assured, then the plan is more in the nature of a pure pension plan rather than an insurance plan with pension scheme.

• Vesting Age

  Age is the age when the investors begin to receive the monthly pension. For example, most of the pension plans keep their minimum vesting age at 45 or 50 years. The vesting age in a pension scheme is flexible up to the age of 70 years. However, some of the insurance companies allow the vesting age to be up to 90 years of age. 

• Accumulation Period

  The investors can either choose to pay the premium at one go as lump-sum investment or in periodic intervals.  The premium invested is simultaneously accumulated over a long-term period in order to create a financial cushion for the future. The accumulation period in a pension scheme is described as the time from which you start investing until the time you invest. For instance, if you start investing at the age of 30 years and you continue to invest until you turn 60, then the accumulation period of the pension plan will be 30 years. Your pension for the chosen period majorly comes from this corpus.

• Payment Period

  The payment period, as the name suggests, refers to the period during which the investor starts receiving the payments post-retirement. For instance, if an individual receives a pension from the age of 60 years -75 years, then the payment period of the pension plan will be 15 years. In most of the pension plan, the accumulation phase is kept separate from the payment period. However, some pension schemes offer the option of partial or full withdrawal during the accumulation period as well.

• Surrender Value

  The surrender value of pension plans is the amount the insurance company will pay the individual if they surrender the plan before its maturity if they have paid the premium for the minimum period. When an insured surrenders their pension plan, they lose all benefits offered by the plan, including the life cover, if any.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

Minimum Guarantee of Pension Plans

Every pension plan must have a minimum guarantee. Every premium paid towards the insurance benefit as well as the maturity benefit must-have ‘on zero returns’, as instructed by the Insurance Regulatory and Development Authority of India. This should not be less than one percent of the premiums paid over the years. Though the minimum guarantee is applicable on all variable insurance plans, most companies offer various types of Pension Plans that may offer better returns than the guaranteed plans. This, of course, varies from plan to plan and you should make sure that you pick ones that offer this best return.  The minimum guarantee of pension plans provides a guaranteed amount that the policyholder will definitely receive at the end of the policy period.

Factors to Consider While Buying Pension Scheme

Here are different factors that should be considered while purchasing a Pension Plan:

• Monthly Expenses: While planning for retirement, it is very important to keep in mind the monthly expenses. After retirement, the regular source of income is cut-off. Thus, in order to keep up with the regular monthly expenses of the family, it important to create a financial corpus big enough to take care of all these expenses. Apart from the monthly expenses, it is important to allocate ample fund for the post-retirement unexpected financial emergencies.
• Inflation: While purchasing a Pension Plan, it important to keep in mind the growing inflation rate and plan accordingly that how much corpus will be sufficient enough to maintain a financially secured lifestyle after retirement.
• Life Expectancy: There is no way to correctly predict how long an individual will live. Thus, while purchasing the best pension plans your retirement fund should be sufficient enough to support your financial needs during the old age.
• Medical Expenses: Young people often tend to ignore the future medical expenses. However, when one gets old, they may have to spend a bomb on medical check-ups and treatments. Thus, it is very important that your Pension Plan should provide you with an adequate fund to deal with any type of medical emergencies.
• Assets and Loans: Another important thing that you should consider while purchasing the best Pension Plans is your outstanding loans and current assets. In case you have any outstanding loans, then repay off these loan(s) on time. If you fail to repay the loan(s) on time then it can take away a chunk of the annuity income.
• Understand Your Financial Needs: It is crucial that you understand how much you need to sustain yourself and your dependents after your retirement.
• Do Some Research: Read through the pension plan details in depth to understand what you are signing up for. The pension details in the pension scheme will offer information on the periodicity of your income, how much is guaranteed, how much is dependent on market performance etc.
• Understand the Different Products: There are various retirement plans available in the market. Shortlist the ones that will fulfill your financial expectations.
• Know About other Retirement Planning Options: Do not stick to a Retirement Planning solution just because someone says so. One product that suits your friend may not suit you. Look up the provident funds, or pension funds offered by the asset management companies and those offered by the insurance companies to get what you need.

Do not look at Only the Tax Benefits: Consider tax benefit as a secondary benefit instead of a primary benefit. If you opt for a retirement plan, considering only the tax benefits, you might not be able to build up the corpus you need for your retirement. So, do your retirement planning calculations and choose a plan accordingly.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

What is Retirement Planning?

Retirement Planning can be described as the process to plan the long-term and short-term financial goals and the ways to accomplish these goals.  Retirement Planning involves identifying different income sources, analyzing the financial objectives, estimating the future expenses, opting for savings program and managing risk and assets.

Planning for retirement is rather a life-long process. Even though, one can start their retirement at any age but it works best, when an individual includes this factor into their financial planning from the starting. Planning for retirement from an early stage of life is the best way to ensure a secured, safe and fun retirement.

Let’s take a look at the key take away of retirement planning.

• Retirement planning can be described as the financial planning of investment, savings and final distribution of money in order to sustain one’s self at the time of retirement.
• There are various popular investment options, which allow the individuals to accumulate fund with the advantage of tax benefit.
• While planning for retirement it is important to consider factors like future liabilities, expenses and life expectancy along with asset and income.
• The early one starts planning for retirement the better fund they can accumulate over a long period of time in order to have a secured life after retirement.