Retirement or Pension Plans
What is a Retirement or Pension Plan?
Retirement plans are meant to provide the insured with a steady source of cash flow in the retirement years of life. These Plans are generally opted for in order to maintain a lifestyle and combat the rising costs of living even when the insured is no longer an income generator. The goal in many Retirement or Pension Plans is to achieve financial independence and security for the insured and any dependents in the post retirement.
What are the benefits of buying a Retirement Plan?
Retirement Plans offer you the chance to put away a part of your savings during the growth years of your life. This “accumulation phase” is where you invest your money in various areas and in a Plan which you can bank on in the twilight years of life. Retirement or Pension Plans come is a variety of flavours which let you choose the way you wish to lead your retired life. Most of the Retirement Plans on offer in India have significant tax benefits associated to them. The money invested in these plans is tax exempt against the income as per the section 80C of the Income Tax code.
What are the different types of Retirement Plans?
Deferred Annuity Plans:
These are the most popular plans in the Indian market today. Most of the major insurers offer these plans in different forms or variations. In essence, the insured pays a regular premium throughout the term period of the plan. This is a built in “accumulation phase”. As defined by the policy, if the insured survives the Plan term, the money accumulated is disbursed in an income like fashion over a time period. No taxes are applied on the sum invested unless it is withdrawn before the policy term ends.
Immediate Annuity Plans:
Under this option, an individual can invest a lump sum amount in the Annuity Plan and start reaping the benefits from Day 1. There are various forms of the Annuity payout in these plans, which determine how and when the annuity sum will be payed out to the insured, and what happens to the sum if the insured outlives the policy. All of these details vary quite a bit across different insurance providers, so it is highly advisable to thoroughly check the annuity payout options available before committing to any particular scheme or insurance plan.
The employee class in India has the options to opt in for an Employee Provident Fund where a fixed monthly instalment is deducted from the employee’s account and is matched by the employer. There is also a government sponsored Public Provident Fund in which a person can invest. All of these investments carry tax benefits under section 80C of the Income Tax code.
National Pension Scheme:
This is a government initiative to provide pension cover for all citizens of India. It has categories to register as a government employee, an individual, a private sector worker or an unorganized sector worker. The National Pension Scheme is regulated through a unique Permanent Retirement Account Number (PRAN) which is portable even if the employee gets transferred. The investment made under the National Pension Scheme are all tax deductible under section 80C of the IT code. For public sector employees, either with the state or central government, this is a good diversification in the Retirement portfolio.
Why choose a Retirement or Pension Plan?
A Retirement Plan is essential these days, with the increasing life expectancy, rising costs of living and a difficult healthcare environment in India. A Retirement or Pension Plan guarantees that you will have a sufficient stream of revenue for you and your dependents even after retiring from your job. A Retirement Plan is therefore an essential investment decision everyone should make early in their life and career. Your Public or Employee Provident Fund will also make a contribution to this phase of your life, but the payout from that may not be sufficient for you to sustain a dignified lifestyle.
How to choose a Retirement Plan?
You can choose a retirement plan based on the following factors:
1. Planned age of retirement:
You need to know how long you want to work and plan your retirement accordingly. If you’re looking to retire early, diversify your investments as much as possible to make your money work for you after retirement.
will you be supporting just yourself, or a spouse or more family members after retirement? That is an essential question to answer when you select a retirement plan to best cover your needs.
This is a tricky one, but there are multiple investment consultants online to help you understand what the value of your money will be when you’re ready to depend on it. That value of a sum like 1 crore today would not be as much even 10 years from now.
All of the above decisions are tough questions to answer. Therefore, you should sit down with a professional in order to understand the Retirement or Pension Plan that is best suited to your needs.
When is the right time to buy a Retirement Plan?
The earlier, the better is a basic thumb rule when it comes to Retirement or Pension Plans. People usually postpone investing in a Plan which will generate benefits only far into the future. However, there should be more awareness about the importance of planning for a proper and dignified retired life, and the planning should begin at an early stage. The premiums for these policies are generally low, and the tax benefits associated with them make them attractive options to invest in.
How can Retirement Plans help protect my family?
A well thought out Retirement Plan means that you will be financially independent in your twilight years. This independence is crucial in these days of nuclear families and will not make you need for money from your family members or children. There is a prediction that India will become an aging society in the future, which means that this kind of society will need to provide for itself.
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