We all work hard and save money for one of the key stages of life i.e. ‘Retirement’. It is essential to have enough savings post your retirement in order to sustain your lifestyle the way you’ve always been living. Therefore, “Pension Plan” plays a very important role in your financial planning.
Everyone would like to continue living a lifestyle the way you have been living during your working life, which is why Pension Plans are also known as ‘Retirement plans’. A certain amount of your current income is transferred and stored for your future by your employer. This amount is then given to the employee as pension fund on his/her retirement.
What are Pension Plans?
Pension Plans are known as retirement plans that require you to make contributions into a pool of funds set aside for your benefit in future. This pool of fund is invested on your behalf, and the earnings on the investment generate income on your retirement.
For your retirement plan, there are heaps of pension plans available in the market. These plans are different from each other. Their benefits, features, exclusions etc. are different too. Pension plans are basically an investment or saving tool to provide for your future retirement needs.
All the pension plans are divided into two parts.
The first part is accumulation where you (insured) pays the premium.
The second part is distribution.
Here, you are paid a regular income through an annuity plan after your retirement. Annuity Plan is a type of insurance which starts paying you an income from the start as per the options chosen by you.
Types of Pension Plans in India Following are the types of Pension Plans in India.
Deferred Annuity
This pension scheme allows you to accumulate corpus through regular premiums or through single premium over a policy term. Once the policy term is over, the pension will begin. The benefits of deferred pension plans are massive. It also includes tax benefit that is associated with this pension scheme. There is no tax levied on the money invested in the plan unless he/she withdraws it. This scheme can be purchased by making regular or by one-time payment towards it. Thus, this plan suits all types of investors.
Immediate Annuity
In this scheme, pension starts immediately. You have to deposit a lump-sum amount and pension will start immediately on basis of the amount invested by the policyholder. You can choose from a range of annuity options available. Also, the premium paid is exempted as per the Income Tax Act, 1961. And, in case of death of the policyholder, the nominee/beneficiary will be entitled to get money as per the option selected.
A few annuity options preferred by many people are:
- Annuity Certain / Guaranteed Period Annuity
- The annuity is paid to the annuitant for a specific number of years as per this clause. The annuitant has the right to choose the period and in case he/she dies before exhausting all the payments, the annuity will be paid to the beneficiary/ nominee. As per this plan, annuity is given to the life assured for certain periods like 5, 10, 15 or 20 years whether or not he/she survives that duration.
- Life Annuity
- As per Life Annuity option, the pension amount will be paid to the annuitant until his/her death. However, if you choose the ‘with spouse’ the amount of pension will be given to the spouse of the policyholder (in case of death).
With Cover and without cover Pension Plans
The pension plans with cover have a life cover component in the plan and states that a lump sum amount will be paid to the family members on the death of the policyholder. The cover amount here is not high, as a major part of premium is diverted towards growing the corpus than covering the risk of life.
On the other hand, without cover pension plan states that there is no life cover. And, in case of an unfortunate death, the nominee/beneficiary of the policy will get corpus accumulated (premiums paid till the date of the death).
National Pension scheme (NPS)
The NPS was introduced by the Government for people to build up the pension amount. However, you can put your savings in the new pension scheme where your money will be invested in equity and debt market as per your preference. Also, you can withdraw 60% of the amount at retirement and rest 40% can be used to purchase the annuity.
Note: Maturity amount is not tax-free.
Pension Funds
Investing in Pension funds is a smart option as these plans remain in force for a long time and also offer better returns at maturity. The Pension Fund Regulatory and Development Authority (PFRDA), established by the government body allows 6 companies as fund managers.
Features of Pension Plans in India
Vesting Age
Vesting age refers to the age at which the policyholder of a pension plan starts receiving your monthly pension. In most cases, the minimum vesting age is generally between 40 years and 50 years and is flexible up to the age of 70 years. However, there are a few companies that extend their vesting age till 90 years.
Payment Period
Do not confuse this with accumulation period. This is the period in which you receive the pension after retiring. For instance, if one receives the pension from the age 60 to age 75, the payment period will be 15 years. Most funds keep this separate from accumulation period, though some funds allow partial/full withdrawals during accumulation periods too.
Surrender value
Surrendering one’s pension plan before maturity is not a smart move even after paying the required minimum premium. This results in the investor losing every benefit of the plan including the assured sum and life insurance cover.
Accumulation Duration
In this period the investor pays regularly or once in this period. This is the time when your wealth starts accumulating in order to build a huge corpus. For example: In case you start investing at the age of 25 years and continue investing till the age of 60. Here, your accumulation period will be 35 years and your pension for the chosen period comes from this corpus.
Benefits of Pension Plans in India
Liquidity
A pension plan is essentially a low liquidity product. There are insurance companies that offer pension funds that are designed to enable policyholders to withdraw your pension amount at the time of accumulation stage. This feature ensures that are always prepared for an unforeseen emergency, in case it arises. Most importantly, it prevents you from being dependent on banks for a loan under such situations.
Guaranteed Pension/Income
This serves the purpose of a stable and reliable source of income after your retirement or as per your preference. This enables you to plan in advance, so that you are financially independent even after your retirement. It is recommended that you use the retirement calculator to get a rough estimation of the retirement corpus you need to aim for. For instance, if you want to build a corpus of Rs. 5 crores as your retirement plan, you have to pay your premiums accordingly.
Tax Efficiency
Policyholders of pension plans can avail tax exemptions under Section 80C of the Income Tax Act, 1961. Besides this, there are other provisions for tax benefits as per Chapter VI-A of Section 80C, Section 80CCC and Section 80CCD of the Income Tax Act, 1961. For example, the NPS (National Pension Scheme) and Atal Pension Yojana (APY) are both subject to tax deductions as per Section 80CCD of the Income Tax Act, 1961.
Death Benefit
It carries a guaranteed death benefit. This is the amount that the nominee can avail on the unforeseen death of the policyholder during the tenure of the pension plan, and is generally 105% of the total premium paid till then. It also includes the benefits of top ups that the policyholder may have selected while purchasing the pension plan. For a plan that has been discontinued, the Death Benefit comprises of the accrued funds against the plan.
In the case of the unforeseen death of the pension plan accountholder, the nominee can opt for any one of these 3 options – withdraw 1/3rd of the maturity amount, utilize the entire benefit amount to buy an annuity plan, or choose a combination of both.
Choice of investments
Every ULIP pension plan has varied investment objectives and risk appetites. Some prefer investments that generate high returns within a short time by exposing the portfolio to comparatively high market risks. Short term equity investments are suitable for such investors. In contrast, some others have a low or moderate risk appetite and, therefore, prefer investing over a long term. The type of pension plan you will select will determine the returns you can avail.
Tips to Choose Right Pension Plans
Minimum and Maximum Investment Amount
You will always find pension plans which carry different limit in terms of maximum and minimum investment. Therefore, it is essential to check your budget before you invest.
Returns
Return is the most important part of any investment. Thus, it is important to choose a pension plan only after you have a fair idea about the returns it would provide. Besides, always remember the rate of return will be low if the returns are guaranteed. So, choose wisely an option which may provide high returns.
Additional Benefits
Nowadays many insurance companies offer additional benefits like life cover, tax advantage, etc. along with the traditional pension plan. Choosing a plan that may offer you additional benefit before you make the final selection. This will, in turn, help you in future.
Liquidity
There are some investment plans which have a lock-in period where you cannot withdraw money at that specific time. However, there are some companies that offer plans with a certain degree of flexibility with regards to withdrawal.
Investment Mix
The Investment Mix part comes into action when pension plans are offered as part of Mutual funds. Therefore, you can always find out investment mix offered by the pension plan.
Tax Benefits
You can save tax on your pension plan to a certain extent. The plans are exempted under section 80C and your contribution is exempted under section Chapter VI-A. Section 80C, 80CCC and 80CCD.
Tax Exemption of Dividend / Interest
You can also look for other factors like tax exemption of the interest or dividend which you’re going to receive in your pension plans. Always remember, most of the pension mutual fund dividends are not exempted from tax.
Keep Inflation in Mind
Inflation plays a major role on your lifestyle, apart from age and duration of the policy. You need to narrow down your search on the sum assured and choose a right policy that would be beneficial to your family once you are gone. Seek professional help from insurance advisors of Coverfox.com to solve your dilemma. In short, your investment should beat inflation.
Complementary
Remember that your pension plans should always compliment your current retirement savings. You should focus on risk/return investments in case you invested too much in conservative instruments.
Flexibility
It is advisable to invest at an early age in pension plans. Your capacity to pay higher premiums can grow only as your income grows. There are certain pension plans that allow increasing the premiums gradually. So, go for it!
Eligibility Criteria for Pension Plans
One has to fall under a certain age group (between 35-75) to be eligible for a pension plan. The age bracket here may vary depend from one insurer to another.
Pension Plans riders
Nowadays, most of the Pension plans come with an additional/add-on riders that enhance your pension plans. Some of the most common riders available are as follows:
- Waiver of premium
- Critical Illness rider
- Accidental death and dismemberment rider
- Term rider
Documents Required to Buy a Pension Plan in India Here’s the list of all documents that is required to buy pension plan in India:
Document for Age proof – Any of the following can be presented as an age proof
- Birth Certificate
- School or High School mark sheet
- Driving License
- Passport
- Voter ID
Document for Identity proof – Any of the following document to prove Indian National Citizenship
- Driving License
- Passport
- Voter ID
- PAN Card
- Aadhar Card
Document for Address proof – Any of the following document can be used to support your permanent residential address.
- Electricity Bill
- Telephone Bill
- Ration Card
- Driving License
- Passport
- Aadhar Card
Document for Income Proof – Income proof specifying the income of the policyholder.
- Salary slip
- Bank Statement slip
- IT return file
Submit Proposal Form – Must submit duly filled proposal form to apply for a pension plan.
Medical Reports – Some life insurance companies may ask for a medical check-up before accepting your proposal for a pension plan. Medical reports are required to be submitted.
“Every Woman Should Invest” book is available on Amazon: http://amzn.in/d/f2t5A1W
www.alpashah.in | empower@alpashah.in
