Retirement opens up a new phase of life in an individual’s life. You finally have the time to check all the things on your bucket list. Hence, you need adequate funds so that you don't have to compromise on your lifestyle during those post-retirement years.

In the absence of a regular source of salary or income you have to rely entirely on your savings and investments. In India, the inflation rate for 2019 was a steep 6.93% 1

Living costs will rise by the time you retire. You also have to take into account medical emergencies and other unforeseen expenses. Thus, to fund your old-age expenses, you need careful planning.

Pension funds can provide a supporting income, letting you enjoy complete financial freedom in your golden years.

Let us understand a bit about pension funds

What are pension funds?

Pension funds are financial tools that help you in accumulating funds for your post-retirement years. By investing a certain amount regularly towards your pension fund, you will build up a considerable sum in a phase-by-phase manner. They generally have two stages–

  • Accumulation stage: You pay a specific amount regularly until you retire.
  • Vesting stage: Once you retire, you get a steady flow of income for life.

Types of Pension funds in India

1. NPS

The government of India introduced the National Pension Scheme (NPS) as a financial cushion for retired persons. Some of it’s features are as follows:

  • You have to invest in this scheme until 60 years of age.
  • The least sum you must invest is ₹ 6000. There is no upper limit.
  • Your money will be invested in debt and equity funds based on your preference.
  • The returns depend on the performance of the funds you choose.
  • When you retire, you can withdraw 60% of the savings.
  • You must use the remaining 40% to buy an annuity – a retirement plan offering periodic income.

2. Public Provident Fund (PPF)

PPF is a long-term investment scheme with a 15 years' tenure. Thus, the impact of compounding is enormous, especially towards the end of the term.

Every year you can invest a maximum of ₹ 1.5 lakhs in your PPF account. You can pay upfront or through twelve instalments staggered over the financial year. Your PPF investments are eligible for tax deductions under Section 80C of the Income Tax Act (ITA). The interest you earn is also tax-free.

The government sets the interest rate on PPF every financial quarter, based on the profits from government securities. The funds are not market-linked.

3. Employee Provident Fund (EPF)

EPF is a government savings platform for salaried employees. Both your employer and you have to make equal contributions towards your EPF account. Your share is removed from your salary every month. The Employees' Provident Fund Organisation (EPFO) sets the interest rate on the investment. On retirement, you receive the total funds contributed by you and your employer along with the accrued interests.

4. Annuity plans with life cover

Such plans provide life cover along with regular source of income. If an unwanted event occurs while the plan is active, your family members receive a lump-sum payout. Other pension plans do not offer this financial coverage. They are of two types of annuity plans

A. Deferred Annuity

It is a contract with an insurance provider helping you build a retirement corpus. You can make a single lump-sum payment or pay regular premiums over a fixed time-frame – the policy term. Thus, this scheme helps you invest as per your resources.

When the policy period ends, your pension starts. If your retirement date is far in the future, this plan is suitable for you.

The government sets the interest rate on PPF every financial quarter, based on the profits from government securities. The funds are not market-linked.

B. Immediate annuity

It is a contract between an individual and insurance company, where in the individual pays a lump sum amount and receives guaranteed income for lifetime, starting almost immediately.

ICICI Prudential Life's Immediate Annuity plan is one such retirement policy that starts paying the annuity right after you purchase it. It offers several benefits:

  • Twelve annuity options, including pension for your spouse or return of price to your nominee in your absence
  • Options to avail income on a monthly, quarterly, half-yearly, or annual basis
  • Attractive discounts for NPS subscribers
  • Tax rebates* for the premiums paid
  • Option for lump-sum payout on the diagnosis of critical illnesses covered under the plan

Thus, this plan secures you against all age-related exigencies and can be a lucrative financial cover in your retirement years.

W/IA/2008/2020-21

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*Tax benefits are subject to conditions of section 80CCC,10(10A) and other provisions of the Income Tax Act, 1961. Indirect taxes and cesses will be charged extra, as per applicable rates. Tax laws are subject to amendments made thereto from time to time. Please consult your tax advisor for details, before acting on above.

Sources

India CPI retail inflation rate 2020 https://indianexpress.com/article/business/economy/india-july-2020-cpi-consumer-price-index-retail-inflation-6551842/#:~:text=India%20CPI%20Inflation%20Rate%202020,Programme%20Implementation%20(MoSPI)%20showed.

1 https://www.macrotrends.net/countries/IND/india/inflation-rate-cpi

NPS - https://npscra.nsdl.co.in/features-and-benefits-of-nps.php

PPF intrest rates, withdrawal & tax benefits - https://cleartax.in/s/ppf

W/IA/2008/2020-21

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