We all work hard through our lives. When we retire we want to live a relaxed peaceful life, living at a standard we lived in our working years. Keeping inflation and seizing of work in scenario, we should save a small part of our earnings in an investment which grows at the rate of inflation or more, that will help us accumulate corpus for a peaceful retirement, with a steady annuity, which helps us maintain same standard of life all through. That is steady income like sum assured to meet our daily expenses and to amount to meet the expenses in time of emergency.
Pension or retirement plans are savings and protection plans. It’s a multi-functional insurance plan with Investment/ saving for corpus, death benefit, survival benefit, regular income and tax saving.
Functioning of Pension / Retirement Plan
Amount is accumulated in the policy term / tenure. Insured can pay premium amount in installments or as a lumpsum, when liquid amount is available in the working years. In lock-in period (which is usually 5 years) during this period insured cannot withdraw or assess amount invested. That way amount is accumulated and is untouched. In the accumulation phase amount collected from insured is invested in securities by the insurance company, to achieve multifold growth of amount, which can be given as annuity to insured in next phase.
In this phase the accumulated amount, which was invested for growth and have achieved steady rate of growth in amount, is now distributed to insured as an annuity / income in regular intervals as agreed at the start of policy. Annuity will be paid either monthly / quarterly / half yearly as selected by insured. In most plans insured has an option of withdrawing 33% of amount in one go. Rest stays invested, which is later given as annuity at regular intervals.
Types of Pension plans
Insurance company pension plans
Pension plans offered by Insurance companies are classified into below types
Guaranteed period return
Deferred Annuity – The premiums are collected from insured through the policy term. Annuity is paid to insured at the retirement age, which policy holder chooses at the beginning of policy. Annuity is paid in regular intervals as chosen by policy holder. This usually comes with a life cover. In case policy holder passes away, nominee gets a sum assured.
Immediate Annuity – In this pension begins immediately. Insured need not pay premium monthly premium instead he can pay as single lumpsum premium so that he can start receiving annuity immediately till the insured is alive. In case of an unfortunate demise of insured nominee will be entitled to receive the money.
Annuity Certain – Fixed amount annuity is paid to insured at fixed intervals of time. In case the insured passes away before the exhausting all payments, annuity is paid to the nominee. Here annuity is fixed.
Guaranteed annuity return - In case of guaranteed period return scheme insured would receive the payment for a fixed period of time and if he/she does not survive the nominee will get the benefit. Here period is fixed.
Life annuity - In this case the policy holder would get the pension till one survives. After her/his death the nominee would get the sum assured plus bonus amount, if any.
the nominee would get the sum assured plus bonus amount, if any.
NPS – National pension scheme is pension scheme introduced by government for people looking at government securities to accumulate pension. One can put money in pension scheme which is invested either in equity or debt markets as per your choice. You can withdraw 60% at retirement, rest 40% will go towards annuity investment. Maturity amount is not tax free.
Provident fund – For all working employees a small amount of their earing is invested in provident fund by their employer, so that pension is paid to employee after retirement. While this is a good provision, this amount is not solely sufficient for meeting your future needs so invest in a pension plan early on.
Benefits of Pension plans
Pension plans come with life cover or without life cover. Deferred annuity plans come with life cover. Life cover is low in this plans as most amount is invested to grow and accumulate corpus for annuity. Immediate annuity plan is without cover.
They come with death benefit if chosen, survival benefit/ annuity
They come in traditional insurance plans or ULIP variation. Sales of ULIPs has gone down considerably due recent market fluctuations. People are opting for traditional plans
Tax saving– double tax benefit on premium paid and on maturity amount under 80 C and 10(10)D respectively
Tips to choose right pension plan
Understand your needs, how much cover you need to retire peacefully. Consider inflation and growing age, old age conditions like dipping health conditions additional expenses required.
Start investing early so that you can invest small amounts for larger period of time to accumulate set corpus
Systematic investment – this always pays a good return steady and small savings for long period of time
Do thorough search know about all options available in the market. Choose right plan that caters your needs well
Insurance is required for more than tax saving. Tax saving is only one aspect of insurance so understand your needs match them with right product. Take product or do not take any.
Pension plans are good to take as Pension fund regulatory and development authority (PFRDA) government has allowed 6 companies as fund managers. So that pension plans offer better amount at maturity.