Types of Pension Plans You Can Choose for Retirement Planning
If you wish to achieve financial stability post-retirement, it is important that you start planning for it as early as possible. Investing in pension plans from early on will help you build a large corpus by the time you retire. In addition, receiving a regular income post-retirement will help you sustain yourself financially when you have no formal source of income.
There are different types of pension plans to serve different requirements. You can opt for one that suits your needs the most.
What Are Pension Plans?
Pension plans offer an opportunity for individuals to accumulate wealth for their life after retirement. In return for your regular contributions while you were working, you get regular payments post-retirement. If you choose an ideal plan as per your financial goals, you can have a stable source of income after retirement. Thus, investing in a pension plan is a great option for everyone who wants to prepare for retirement.
How Do Pension Plans Work?
The time it takes for pension plans to mature and offer regular income can be divided into two stages: accumulation and vesting. The accumulation stage is when you pay the premium towards any particular pension plan, and it gets invested in a fund or underlying asset of your choice. This usually happens when you have a stable job and contribute a part of it towards pension plans.
On the other hand, vesting stage is when your plan matures after a certain period, and you start receiving benefits on a monthly, quarterly or yearly basis. At the vesting stage, you get two options: receiving your plan’s benefits via a lump sum amount or getting a part of the accumulated wealth as a lump sum payment and the rest as periodic payments.
Also Read: Here’s How You Can Retire Rich in India
What Are the Types of Pension Plans in India?
Pension plans help in accumulating a retirement corpus to help you achieve financial stability in the future. However, not everyone has the same requirement after retirement. There are different types of pension plans available in the market that have varied features and benefits. Whether you are a salaried individual or an entrepreneur there are plans to meet everyone’s requirements. Here are some pension plans that are most preferred in India:
National Pension Scheme (NPS)
The Government of India introduced NPS to secure the financial future of individuals after retirement. The money invested in NPS is managed by pension fund managers and gets invested into equity and debt funds according to the beneficiary’s preference. You can invest in NPS at certified banks and post offices.
Any individual who is a subscriber of NPS can claim tax benefit under Section 80 CCD (1) within the overall ceiling of Rs. 1.5 lac under Section 80 CCE. An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is also available under subsection 80CCD (1B).
After retirement, you can withdraw 60% (tax-free) of the savings while the remaining 40% (taxable according to your tax-slab) can be used to purchase an annuity plan. There are two types of NPS accounts: Tier-I and Tier-II accounts. The Tier-I account is mandatory and you cannot withdraw any funds from it till you retire. On the other hand, the Tier-II account is not mandatory but gives you the freedom to withdraw money whenever you want to.
This is a type of agreement between two parties: the insurance company and buyer. For this, payments are to be made regularly to get long-term regular income after retirement. There are various types of annuities available in the market, some of which have been discussed below:
- Deferred Annuity: In this type of plan, the premiums begin right after you opt for the plan; however, the payout starts after a certain period of time. You deposit your premiums by making periodic payments. This type of plan is suitable for those who have certain working years left before retirement. This plan typically provides life cover so that the nominee gets a lump sum in case of the policyholder’s untimely death. Most annuity plans allow you to start investing at the age of 40
- Immediate Annuity: As the name suggests, the payout from this type of plan starts immediately after you purchase the policy and pay the premium amount as lump sum. Under this scheme, you can choose from a wide range of annuity options. You can even select whether you want your pension monthly, quarterly, semi-annually or annually. In addition, the nominee gets the money in case of the beneficiary’s death during the policy’s tenure
- Certain Annuity: Under this pension plan, you will get the annuity only for specific years. The annuity can be taken in the form of a lump sum as well. This plan has a set duration, so the returns are higher than the other annuity options without set duration. However, they also have high upfront fees and additional charges compared to traditional annuities. If the person dies during the fixed tenure, the nominee of the plan will get the remaining payment.
- Life Annuity: Under this, the pension will be paid till the demise of the person who purchased the annuity. This plan also provides the option of opting for a joint annuity, where the spouse gets paid after in case of the death of an annuitant.
Read More: PPF vs LIC: A Detailed Comparison
This type of pension scheme remains in force for a long time. They are regulated by the Pension Fund Regulatory & Development Authority (PFRDA). Currently, these are the fund houses that offer pension funds in India:
- SBI Pension Funds Pvt. Ltd.
- UTI Retirement Solutions Ltd.
- LIC Pension Fund Ltd.
- ICICI Prudential Pension Fund Management Co. Ltd.
- HDFC Pension Management Co. Ltd.
- Aditya Birla Sunlife Pension Management Ltd.
- Kotak Mahindra Pension Fund Ltd.
- Reliance Capital Pension Fund Ltd.
These funds provide better returns during the maturity period compared to others. Investors may withdraw a certain amount of sum in case of an emergency. Therefore, they don’t need to rely on banks for loans during any emergency.
Pension Plans with Life Cover
These plans offer the benefits of both investment and life insurance. You can invest a part of your premium in the underlying assets of your choice, while the remaining will get accumulated for life insurance. You can choose to withdraw the entire amount at once after maturity or opt for regular payments. In addition, the nominee will receive the plan’s benefits if the holder passes away during the policy term.
Public Provident Fund (PPF)
It is a long-term investment scheme for a tenure of 15 years. You can invest a minimum of Rs 500 and maximum of Rs. 1.5 lakh in your PPF account. You can either pay a lump sum amount or pay it in 12 instalments over the financial year.
The government sets the interest rate offered by PPF every financial quarter based on the profits earned from government securities. The fund is not linked to fluctuations in the stock market, which means if you have a low-risk appetite this is a great choice for you. Moreover, the investments in this scheme are tax deductible under section 80C of the Income Tax Act.
Defined Benefit Pension Plan
Under this scheme, a specific pension payment or lump sum or a combination of both is paid by the employer to the employee. The employer sponsors this type of plan. The pension you receive depends on your salary in the organisation and the number of years you spent there.
As the name suggests, the pension amount to be disbursed is conveyed to the employee beforehand. You are assured of the returns irrespective of how the underlying fund performs.
Also Read: Step-By-Step Approach To Retirement Planning
Whole Life ULIP Plan
Unit Linked Investment Plans (ULIPs) help you build an extensive corpus for retirement and also provide life coverage. ULIPs are essentially a mixture of insurance + investments. For this kind of plan, you can make periodic investments or pay lump sum amounts. You also get to select your preferred assets, and your investment will be made in the fund of your choice.
Most ULIPs offer guaranteed capital protection to eliminate the chances of capital loss. You get tax benefits as well as multiple payout options. Moreover, some insurance providers also offer pension boosters. When you have already invested in a ULIP for 10 years, the insurance provider adds an average total fund value of around 5% to your retirement corpus every 5 years to grow your savings.
If you are planning to invest or purchase a pension plan, check the features, benefits and working of all the types of pension plans to select the best one. There are different types of pension funds available in the market that can be the ideal retirement plans for different types of working or self-employed individuals. Make sure to assess your post-retirement finances before going ahead with any investments.
FAQs about types of pension plans
Do I still need a pension plan even after having a provident fund account?
Yes, you might need a pension plan as PF might not be enough. With the rise in inflation, the PF amount upon maturity might not be sufficient in bearing your expenses in the future including your healthcare costs.
How to calculate the retirement corpus?
You can use a retirement calculator to do so. Your monthly expenses, retirement age, inflation rate and life expectancy will help you calculate an ideal corpus. It is ideal to come up with an amount that will help you sustain your lifestyle and emergency needs post-retirement.
How are Pension Plans different from Term Plans?
Term plans offer financial security to your family in case of your demise. You can withdraw the entire amount at once post maturity, and the returns are tax-exempt. On the other hand, a pension plan helps you to accumulate wealth that you can use for yourself and your family post-retirement. One-third of the maturity amount that you get in lump sum is tax-exempt, while the remaining you get as an annuity and is not tax-exempt.