Superannuation Retirement

What is Superannuation Retirement?

Superannuation, also sometimes called a company pension plan, is a retirement savings scheme offered by employers to their employees. It is basically a way to set aside money throughout your working life to provide you with financial security after you retire.

How Does Superannuation Work?

• Contributions: Both you and your employer contribute money to a superannuation fund on a regular basis. The employer contribution is usually a percentage of your salary. You may also be able to make voluntary contributions.

• Tax Benefits: Contributions to superannuation funds are often tax-deductible, which means they are taken out of your salary before tax is calculated. This can give your retirement savings a bit of a boost.

• Investment and Growth: The money in your superannuation fund is invested and grows over time, hopefully outpacing inflation.

• Retirement Access: When you retire, you can access your superannuation savings. You may be able to take a lump sum payment, purchase an annuity (which provides a regular income stream), or a combination of both.

Types of Superannuation Retirement Plans

The superannuation pension plans can be categorised as defined benefit and defined contribution plans, which serve similar purposes. Let us learn about them below:

Types of Annuities under the Superannuation Retirement Scheme

Following are the types of annuities available under the superannuation scheme:

1. By Payout Timing:

   • Immediate Annuity: You start receiving regular payments immediately after purchase. (This aligns with the concept of a pension)

   • Deferred Annuity: Payments begin at a future date you choose, typically used if you do not need immediate income.

2. By Payout Structure:

   • Payable for Life: You receive regular payouts throughout your lifetime.

   • Return of Corpus: You get regular payouts for life, and any remaining corpus amount is returned to your nominee after your death.

   • Guaranteed for a Term (5/10/15/20 Years): You receive payouts for a fixed period you choose, regardless of your lifespan.

3. By Beneficiary:

   • Joint Life Pension (With or Without Return of Corpus): Your spouse or partner continues to receive payments even after your death. This can be with or without a return of any remaining corpus.

   • Joint Life with 50% Pension to Spouse: Both you and your spouse receive payouts during life. Upon the first death, the surviving spouse receives 50% of the original payout.

   • Increasing Pension: Your regular payouts increase periodically to hedge against inflation.

4. Other Option:

   • Commutation: This is a one-time lump sum payment you can choose instead of receiving regular annuity payouts. However, this option forgoes the guaranteed income stream an annuity provides.

Taxation on Superannuation Retirement Plans

While India doesn't use "superannuation" for retirement plans, taxation on defined contribution plans (the most common type) follows these principles:

• Employee Contributions: Contributions by employees are generally tax-deductible up to a specific limit (currently ₹1.5 lakh) under Section 80C of the Income Tax Act.

• Employer Contributions: Up to a certain limit of the employer's contribution (often ₹1.5 lakh) is exempt from tax for the employee. Any amount exceeding the limit is considered a perquisite and taxed as income in the employee's hands.

• Earnings on Contributions: The interest or returns generated within the plan are generally exempt from tax until withdrawal.

• Withdrawals at Retirement: A portion of the corpus (usually around 1/3rd) is tax-free on withdrawal. This percentage can vary depending on the specific plan.

The remaining amount can be used to purchase an annuity (tax-free payouts) or withdrawn as a lump sum (taxable). The tax implications for lump sum withdrawals can differ slightly depending on the plan.

In Conclusion

Superannuation retirement in India is important for securing your financial future after you stop working. It involves funds contributed by your employer to provide you with a steady income and benefits during retirement. This helps you maintain a stable lifestyle and highlights the need for careful financial planning throughout your career.