Pension Fund

Pension funds are the best investment option to help individuals prepare for their golden years by providing them with a regular income stream post-retirement. With the right financial planning, pension funds can generate long-term growth and steady returns, ensuring that you have the financial security you need in your later years.

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  • Wealth Generation to beat Inflation

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This article will help you to understand all about a Pension fund and get the benefits of financial security and peace of mind.

What is a Pension?

A pension is a retirement benefit you get as a regular fixed income stream during your retirement years. To get a pension you invest in the best pension plans during your working years. 

Learn More About a Pension:

  • You invest in a Pension Fund to get periodic pensions later.

  • An employer or employee, an individual, or the government may fund your pensions.

  • A pension is an important component of retirement planning for being a reliable and predictable source of retirement income.

  • The amount of the pension benefit depends on:

    • Your income

    • Length of service

    • Terms of the pension plan

  • Pensions may be subject to various risks affecting your retirement amount. These risks may involve:

    • Investment risks

    • Inflation risks

    • Longevity risks

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What is a Pension Fund?

A pension fund is a type of investment fund that is set up to provide retirement benefits to employees/ individuals of an organization/ government institutions/ private sector individuals. 

Important Points to Know About a Pension Fund:

  • The contributions made to the pension fund are invested in various assets.

  • Examples: Stocks, bonds, real estate, and other investments generating returns over time

  • The accumulated contributions and returns work as retirement benefits to the members of the pension fund.

  • The payouts of this fund are usually in the form of a regular income stream after retirement.

Types of Pension Funds

There are multiple ways to categorize a retirement fund depending on various criteria. Let us learn about different types of Pension Funds from a list of tables.

  1. Based on Eligible Members

    Depending on the category of individuals who are eligible to buy the retirement plan, the types of Pension Funds are as follows:

    Types of Pension Funds Details
    Open Pension Fund
    • Everyone is eligible to buy
    • Examples: National Pension Scheme (NPS), ULIP Plans and Mutual Fund Schemes
    Closed Pension Fund
    • Limited to a certain category of people
    • Examples: EPF and Atal Pension Yojana (APY)
  2. Based on the Type of Pension Fund Provider

    The variety of a pension fund varies along with the fund security and other benefits depending on who is selling the pension fund. 

    The types of pension funds based on pension plan provider are as follows:

    Types of Pension Funds Details
    Private Pension Fund
    • Offered by private companies
    • Regulated under private sector laws
    • Examples: Retirement Mutual Funds and ULIP Plans
    Public Pension Fund
    • Offered by government institutions
    • Governed under public sector laws
    • Examples: National Pension Scheme (NPS) and EPF
  3. Based on Pension Fund Payouts

    A pension fund is also categorised based on the category of pension payout options in the following ways:

    Types of Pension Funds Details
    Deferred Annuity
    • Pension fund payout is deferred until a later date from the date of maturity
    • Investment in a Deferred Annuity fund can be in a lump sum or regular payments
    Immediate Annuity
    • You make a lump sum payment in the annuity pension fund
    • Pension fund payouts start immediately
    Annuity Certain
    • A guaranteed pension payout is paid for a specified period
    • Whether the annuitant is alive or no more, the pension will continue until the end of the pension fund tenure

Best Pension Funds in India

Various insurance companies, government agencies, and mutual fund houses offer pension funds in India. 

The list of some of the most popular and best Pension Funds in India is as follows:

Type of Pension Fund Investment Amount Limit Who can Invest? Entry Age Lock-in Period Pension Fund
Returns
Investment Risk Tax Benefits
Unit Linked Insurance Plan (ULIP) Rs. 500—No Limit Available for all 1 year- 5 years 8-13% p.a. Medium- High Available u/ Sec 80C and 10 (10D) of the IT Act
National Pension Scheme (NPS)
  • Tier I: Rs. 500
  • Tier II: Rs. 1000
  • General Citizens
  • Senior Citizen
  • NRIs
  • Age of General Citizens: 18-60 years
  • Age of Senior Citizens: 60-70 years*
Age of up to 60-70* years (extendable by 5 years) 9-12% p.a. Medium- High Available u/ Section 80 C, 80 CCD, and Section 80 CCE of the IT Act, 1961
Public Provident Fund (PPF) Rs. 500 – 1.5 lakhs per year
  • Salaried Employees
  • Self-employed citizens
  • Unorganised Workers
18 years till employment 15 years or more 7.1% p.a. Low
  • Contributions: Tax benefits u/Sec 80C of the IT Act
  • Interest earned and maturity amount: Tax-free
Atal Pension Yojana (APY) Rs. 42- Rs. 1,454 per month  Unorganised sector workers 18-40 years of age 20 years or more Rs. 1,000- Rs. 5,000 Low Tax benefits u/Sec 80CCD of the IT Act
Employee Provident Fund (EPF)
  • 12% of the employee’s salary is invested by the employee
  • Equal contribution by the employer
  • Salaried individuals earning a monthly income of up to Rs. 15,000
  • Voluntary for all other employees
Until the employee gets retirement N/A 8.1% p.a.
From Debt-based investments
Low-Medium Tax-free interest and returns
Pension Funds by Insurance Companies Rs. 1000-No Limit Open to all 40 years of age- lifetime -- 7-13% p.a. Medium- High Tax benefits available ULIP or ELSS funds
Retirement Pension Mutual Funds Rs. 500- No Limit Open to all N/A Minimum 3 years for ELSS funds 7-13% p.a. Medium-High Tax benefits in ELSS funds

Note: Central Government increased the entry age of the NPS Scheme for senior citizens to up to 70 years in 2021.

Features of a Pension Fund in India

In India, pension funds typically have the following features:

Features Details
Regulatory Authority Pension Fund Regulatory and Development Authority (PFRDA)  is the regulatory body for pension funds in India
  • Regulates their operation 
  • Oversees their management
Multiple Fund Options
  • Availability of multiple varieties of pension funds
  • Examples: Pradhan Mantri Shram Yogi Maan-Dhan (PMSYM), among others
Voluntary Participation
  • Participation in the retirement funds is voluntary
  • You can join and contribute to the funds based on your financial goals and retirement planning needs
Investment Options
  • Equity funds
  • Debt funds
  • Hybrid funds
  • Government Securities
Tax Benefits
  • Contributions to a pension fund are eligible for tax benefits under Section 80C of the Income Tax Act, of 1961
  • Accumulated corpus is tax-free up to a certain limit
Portability
  • You can transfer their funds from one fund manager to another or from one scheme to another
  • This does not affect the continuity of your pension fund benefits
Annuity Options
  • Pension funds in India provide various annuity options to the subscribers post-retirement, for example:
  • Lump sum annuity option
  • Regular pension payments option
  • Deferred pension payment option

Benefits of Investing in a Pension Fund

Here is a list of the top benefits of investing in a pension fund in India:

  1. Retirement Planning 

    A pension fund provides you with a disciplined and structured approach to retirement planning. It allows you to build a retirement corpus and receive a regular income stream after retirement.

  2. Tax Benefits

    Contributions to pension funds are eligible for various tax benefits under the Income Tax Act. This helps in reducing your taxable income.

  3. Long-term Growth Potential 

    Best retirement funds offer long-term growth potential by investing in a diversified portfolio of assets. This opens up an opportunity to generate higher returns than traditional savings accounts.

  4. Professional Management 

    Professional fund managers, having expertise in managing investments, manage pension funds. This can help you to achieve better returns on your investment.

  5. Flexibility

    Pension funds in India offer flexibility in terms of investment options, contribution amounts, and withdrawal options. This allows you to customize your retirement planning based on your needs and financial goals.

In Closing

Whether you are an employee of a large corporation or a self-employed individual, a pension fund is a crucial source of retirement income. It can help you to achieve financial security and peace of mind in your retirement years. This makes it a valuable investment tool allowing you to enjoy your retirement years without worrying about your finances.

FAQ's

  • What is a pension fund?

    A pension fund is a type of retirement plan for an individual in which the employee/ employer/ government/ individual contributes funds to a pool of investment assets to get a regular income of money after they retire. The investment assets could be stocks, bonds, and real estate.
  • What is an example of a pension fund?

    Some of the top pension funds in India are as follows:
    • Unit Linked Pension Plans (ULIPs)
    • Pension Mutual Funds
    • National Pension Scheme (NPS)
    • Atal Pension Yojana
    • Employee Provident Fund (EPF)
  • How do I get Rs. 50,000 monthly pension?

    Here are the key steps to achieve the target of getting Rs. 50,000 monthly pension in India:
    • Determine your investment target as per your income and expenses
    • Choose among the best pension plans in India
    • Start to invest early
    • Save more and invest regularly
    • Get the benefits of tax savings
    • Diversify your investment assets
    • Assess and monitor your investments
    • Seek professional advice
  • Is a pension fund a mutual fund?

    A pension fund can be created by investing in market-linked mutual fund schemes. Various insurance companies and National Pension Scheme provide the opportunity to build a pension corpus by investing in government securities/ debt/ equity/ hybrid funds.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
+Returns Since Inception of LIC Growth Fund
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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