You may be a government employee, a salaried employee or a self-employed businessperson or a professional earning a decent income. Your life would be comfortable as long as you are earning income by way of salary or profits from business or profession.
When you retire and your salary or income stops, you will be wondering how to meet expenses for your day-to-day living. Typically, government employees are assured of a pension for life after retirement and often after their demise the spouses enjoy the pension subject to some limitations till they continue to live. However, this facility may not be available to non-government employees and self-employed businesspersons or professionals who have to fend for themselves. Thankfully, the financial market offers various plans known as pension plans that can help you to receive a pension even after retirement.
Concept of pension
The concept of a pension plan is simple. You set aside a certain portion of your income throughout your active income-earning life for your life after retirement. These amounts are placed in pension funds which reap the benefits of compounding and allow you to build up a corpus through which you can start receiving a monthly income post-retirement.
There are various types of pension plans offered by a host of companies operating in the financial sector. In order to help you choose the plan that meets your requirement here’s a snapshot of the various types of pension plans.
1. National Pension Scheme (NPS)
NPS is a pension program implemented by the government of India to act as a social security scheme for anyone earning an income up to the age of 60 years. During this period they can invest in the NPS and withdraw up to 60% of their corpus at age 60 and the balance would be returned as a pension for life in the form of annuity payments. NPS invests the premiums collected from members in four types of asset classes - Equity, Corporate debt, Government Bonds and Alternative Investment Funds – with equity exposure limited to a maximum of 75%. The scheme offers safety by investing in safe instruments. The scheme also offers flexibility allowing investors to switch based on their specific needs, receiving a lump sum limited to 60% of corpus accumulated at the age of 60.
NPS operates under the purview of the Pension Fund Regulatory and Development Authority (PFRDA).
2. Traditional Pension Plan
This type of pension plan comes with four options – a regular pension plan, a pension plan with life cover, a pension plan with immediate annuity payments and a pension plan with deferred annuity payments. Let’s understand the offerings of each option.
- The regular pension plan invests all the money that you set aside and you get a corpus at the end of the term including interest earned. In this plan, if you do not survive the policy term, your nominee would receive the corpus along with interest earned till the time of your demise.
- The pension plan with life cover takes out a portion of the money set aside by you to pay premium for covering your life through a term policy for a sum assured. Typically, the premium is low for a term insurance. Thus, in this plan your nominee would receive the sum assured in case of your demise, before the end of the policy term, and they will also get the sum accumulated from the start of the policy till the time of demise.
- The pension plan with immediate annuity payments allows the policy holder to start earning an income from the month following the month of investment. This is akin to earning monthly interest income from a fixed deposit in a bank.
- The pension plan with deferred annuity payments allows the policy holder to accumulate a corpus by paying premiums during the policy term. At the end of the term, the premiums paid and interest earned become a sizeable corpus allowing the policyholder to buy an annuity and earn a regular pension. Typically, pension plans with deferred annuity payments come with a life insurance cover.
These pension plans are known as traditional pension plans because the premiums you pay are invested in conservative government and debt securities which are considered to be safe. These are offered by various life insurance companies.
3. Unit Linked Pension Plans*
Traditional pension plans invest the premiums received from you in safe investments such as government and debt securities. For those with a more aggressive outlook (high risk appetite), there are pension plans that invest a substantial portion of the premiums in high return-high risk investments such as money markets, non-government securities, bonds and stocks. These plans are known as unit linked insurance plans (ULIP). The main feature of these plans is that the investment component is represented by investing the funds in equity instruments. These plans provide opportunities for you with different risk profile – low, medium and high. You can switch between plans during the policy term at your discretion, subject to certain terms and conditions.
The unit linked pension plans do have a life assured component to cover risk of premature death. The returns in these are not guaranteed, but you can expect a reasonable return consistent with the vagaries of the stock market. Historically, investments held for the long term in stocks have given handsome returns. Thus, at the end of the policy term you have an option to withdraw at the prevailing NAV of the fund opted for, or continue to invest.
Why should you opt for Pension Funds
There are many reasons why you should opt for pension plans.
If you have not planned for your retirement then investing in a pension program is a prudent strategy. Often, in your hectic professional life you are often occupied with various pulls and pressures and may not find the time to plan for your retirement. However, if you start as soon as you start earning and keep setting aside a certain portion of your income every month and investing this amount in a pension plan, you can hope to have a good income for your retired life.
Guaranteed income after retirement
You are assured of a regular income post retirement. What is more, if you earn enough and save appropriately you can plan for your retirement income and decide on the quantum of your post retirement fund at the time of entering the plan.
Decide the vesting age
You can decide the vesting age (the age at which you want the annuity payment to begin) in some of the plans (typically 60 but could start at 45 and stretch to 90). The vesting age is 60 years in the case of NPS.
Decide the premium paying term
You can decide the premium paying term from single premium to a certain number of years.
Decide on the annuity term
You can decide on the number of years you want the annuity paid. It could be for life or for a fixed number of years. You could also choose a plan that includes the spouse in your calculations.
Decide based on your risk profile
You can decide on the type of pension plan or a combination of different plans to suit your risk appetite.
Pension plans are regulated
Pension plans are regulated by IRDA and PFRDA.
The savings made in pension plans and NPS qualify for following benefits under the Income Tax Act:
- Premiums paid under pension plan qualify for deduction from taxable income up to ₹1,50,000 under Section 80C#
- Amount paid under NPS qualify for deduction from taxable income up to ₹1,50,000 under Section 80CCD(1)#
- Additional deduction from taxable income up to ₹50,000 is allowable under Section 80CCD(1B)# for amount paid in NPS
- 60% of lump sum withdrawal on maturity from NPS is exempt subject to Section 10(12A)
It is clear that pension plans offer a wide choice to suit your requirements. With a little bit of planning and understanding of various plans, you can plan for a secured life after retirement. The market offers many opportunities and it is up to you how you want to plot your life after retirement. Pension plans can really help you get there.
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*Unit linked insurance products are subject to market risk, which affect the Net Asset Values & the customer shall be responsible for his/her decision. The names of the Company, Product names or fund options do not indicate their quality or future guidance on returns. Funds do not offer guaranteed or assured returns.
#Tax benefits are subject to conditions of section 80C, 80CCD, 10(12A) and other provisions of the Income Tax Act, 1961. Tax laws are subject to amendments made thereto from time to time. Please consult your tax advisor for details, before acting on above.