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No matter at what stage in life you are, having money in your pocket is always important. Being financially independent, you have the resources and the confidence to lead a comfortable life. When you are working you earn to achieve your standard of life, however, things may not remain the same once you retire. You always need some financial security. Are you prepared for retirement?
Why Retirement Planning?
Most people in India would not have a definite answer for the same since they would not be well prepared for retirement. According to a recent survey by Market Research Agency Nielsen, it was found that over half the respondents had not planned any flow of income post their retirement. In fact, most Indians invest little and spend a big chunk of their income on everyday living expenses. People like to spend on education, clothes, travelling, maintaining a certain lifestyle, etc. but when it comes to pension plans most are not even aware of the amount of money they might need after retirement. Thus, retirement planning often takes a back seat.
Considering the ever-increasing inflation and the fact that you would no longer have a regular source of income, investing in a pension plan has become quite fundamental. In this article, we are going to discuss everything that you need to know about a Pension Plan.
What is a Pension Plan?
A pension plan often referred to as a retirement plan, is an option where you can collect a part of your earnings/savings for a long-term period in order to save for a secured financial future. A retirement plan would help you in dealing with any unpredictable financial emergencies that may arise after your retirement. A good amount of savings would not only help you deal with inflation rates but would also be beneficial in helping you have a regular flow of income. So, even if you think you have saved enough for your future, having a pension plan is still crucial.
In simple words, when you invest in a pension plan, you contribute a certain amount at regular intervals for a certain period of time. When you retire, this amount is given back to you as a pension or as an annuity at specific intervals. Life insurance companies offer such pension plans so that you can plan your retirement.
Let us take an example, Arjun is a 45-year-old married man, he doesn’t have children. He wants to retire when he turns 60 and thus he has about 18 years to plan his retirement. His monthly salary is INR 1 lakh per month, while the monthly expenditure is around INR 55,000. He has medical insurance but still wants to keep INR 5,000 as monthly miscellaneous expenses. Now, considering the above numbers, let us see what he would need to retire comfortably.
|Current Monthly Expenses
|Estimated Post-Retirement Monthly Expenses
|INR 55,000 + INR 5,000= INR 60,000
|Years left to Retire
|Post-Retirement Monthly Expenses
|INR 64,200 (With an inflation rate of 7%)
|Retirement Corpus Required
64,200 X 12 = INR 7,70,400 (Annually)
7,70,400 X 18 = INR 1,38,67,200 (In All)
So, from the above table, it may be estimated that Arjun would require approximately INR 1.39 crores to maintain a similar standard of living. He, therefore, needs a pension plan that would fetch him INR 64,200 a month.
Choosing the right kind of pension plan is, therefore, very important in planning your retirement in a systematic way. Let us take a look at the different types of pension plans.
Types of Pension Plans in India
There are two kinds of pension plans - deferred annuity and immediate annuity. Let’s discuss each in detail.
- Deferred Annuity Plans
Under this plan, you collect a corpus by regularly investing in a policy. You can pay through a single premium or regular payments throughout the term. When the policy term expires, the collected amount will be given to you. In case the policyholder dies during the term of the policy, the nominee would receive a death benefit. In this way, a deferred annuity plan will provide you with annuity payments throughout your life along with insurance cover.
Such schemes are considered to be suitable for all kinds of investors, be it the ones who wish to invest a lump sum or those who want to pay in smaller amounts regularly.
Given below are some features of a Deferred Annuity plan:
- When you reach your vesting age, you can make a withdrawal of one-third of the amount in cash, which would be tax-free
- You can earn a bonus in a deferred annuity plan
- When offered as an insurance plan, you will get guaranteed returns and when offered as a unit-linked insurance plan you can avail of market-linked returns
- You can pay the premiums together as a lump sum for a set period or throughout the policy term
- There are 3 phases in a deferred annuity plan:
- Accumulation Phase - When premiums are paid to form a corpus
- Deferment Phase - In this phase the corpus grows
- Vesting Phase - When you receive the pension payment
2. Immediate Annuity Plans
As the name suggests, immediate annuity plans offer the pension immediately. There is no waiting period, however, the entry age of the plan may differ among companies. You pay a lump sum amount of money and when you retire, or when the policy term ends, the pension will be paid out instantly.
On vesting, the annuitant needs to choose an annuity option from the following available choices in order to receive monthly pension:
- Life Option
In this option, the policyholder/annuitant will receive the annuity till the time he/she is alive. There is no death benefit in this option.
- Joint Life Option
The annuitant will receive the annuity till the time he/she is alive and in case of his death the nominee would receive the annuity for the rest of his/her life. The percentage of annuity received will depend on the kind of plan selected.
- Annuity for Life and Return of Purchase Price
The annuitant will receive the annuity as long as he/she lives, in case the annuitant dies, the secondary annuitant would receive the annuity. In case of the death of the secondary annuitant, the nominee would receive the purchase price of the plan.
- Joint Life Option with Return of Purchase Price
The annuitant will receive the annuity as long as he/she lives, in case the annuitant dies, the nominee would receive the purchase price of the plan.
- Annuity Certain
The annuitant will receive the annuity for a specified number of years, if he/she dies during this period, the nominee would receive the annuity.
3. Pension Plans with and without sum assured coverage
Some pension plans have an element of life insurance attached to it to cover the risk of the insured’s life. While other plans do not have any coverage. Hence, pension plans can be with or without life insurance coverage benefits.
4. NPS or National Pension Scheme
The NPS scheme was introduced by the Central Government of India in order to help people build a retirement corpus for the private, public as well as unorganized sectors of society. The NPS Fund is managed by the PFRDA (Pension Fund Regulatory and Development Authority) wherein the investor has an option to invest in equity as well as debt to create the retirement corpus.
On vesting, the annuitant can commute a certain percentage of the corpus and opt for an annuity from the remaining.
When you buy this plan you have the freedom to choose from the available annuity options. The premiums that you pay towards the plan are exempted under the Income Tax Act, 1961. In case the policyholder dies during the term of the policy, the nominee would receive a death benefit.
Given below are some features of an Immediate Annuity plan:
- The frequency of premium payment can be as per your convenience, it can be monthly, quarterly, half-yearly, or yearly
- There are several available options for the payment annuity. For example, increasing annuity, joint-life annuity, etc.
- As they are immediate, these annuity plans offer a guaranteed rate
- The premium has to be paid as a single premium, it is also called purchase price
Benefits of Pension Plans
Pension plans are regarded to be a great tool to plan your retirement because of the following benefits:
- Lifelong Income
As a young earner, you have a long investment tenure, and if you invest at the right time, you can build up a strong corpus. This way you can plan a comfortable and independent retired life.
- Joint Life Annuity
When you invest in an immediate annuity, you can add your partner as a secondary annuitant, and in the unfortunate event of your death, the annuity pay-outs would continue till the time your partner is alive. Even in your absence, your partner would have a regular source of income.
- Post-retirement Financial Back-Up
There are certain pension plans that allow you to withdraw a specified percentage of the corpus, in case you need some money. It is recommended that you go through the details of the policy before investing.
- Tax Benefits
- The premiums that you pay towards the plan are exempted under the Income Tax Act, 1961 under section 80CCC
- 1/3rd of the total corpus can be commuted tax-free under section 10(10)A. However, the pension received would be taxable in the hands of the annuitant.
- Retirement Specific Corpus
These plans create a set amount of corpus, especially for your retirement.
- Retirement Corpus
Pension corpus can be created either with an endowment or a unit-linked plan. Depending on the policyholder’s risk appetite, the corpus can be created accordingly. Through a unit-linked annuity, you can avail market-linked returns on the investment that you have made.
- Add-Ons Enhance the Cover
There is the option to add riders/add-ons to your pension plan. These riders can cover illness, accidents, etc.
How to do Your Retirement Planning Right?
When planning your retirement you need to first identify your goals and then find the cost of these goals. For instance, if a child’s college costs about INR 50 lakhs today, after 15 years keeping in account an inflation rate of 7% it would be around INR 1.38 crore. So, if you wish to plan your child’s education calculate an estimate of how much you would need when. Similarly, you need to find out all such expenses that you would be incurring in the coming years.
Given below are certain factors that must be considered when planning retirement:
- Chalk out Your Expenses
It is important to chalk out how much you spend, for example, your expenditure in a month would help you get an estimate of how much you would need in the future. When the regular supply of income is cut off you would need an amount big enough so that you can maintain your standard of living.
- Cater to Medical Expenses
Most young people stay unaware of the fact that medical requirements would grow with age. As you grow older there would be regular expenses on check-ups and healthcare. Make sure your pension plan allows you to deal with medical emergencies.
- Inflation is a very important factor
The amount of money that seems enough today, may not be so tomorrow. Compare your salary with that of your parents and you would realize how inflation plays a key role in dividing the amount you would be needing.
- Life Expectancy
Though nothing can predict how long you would live, you should plan to a reasonable extent.
- Assets and Liabilities
Keep in mind the loans you would still have on you once you retire, the assets that you would have built, your children’s education and their weddings, etc.
- Your own Financial Needs
Retirement should not mean living meagerly. Plan in a way that you have enough to sustain your hobbies and interests.
- Research and Understand
To have an understanding of how pension plans work and how you can make the best of them, you must do adequate research. Surf the web, read about them, speak to people, go through reviews and then make up your mind.
- Know Your Options
Apart from pension plans, you must look for options that would help you save for the future. Investing in safe and low-risk products can be very beneficial.
Retirement Planning in the 30s
When in your 30s, you are generally settling into your family life, planning children and your future. As you still are not very close to your retirement, you can weigh the different options available and even create a mix of investments. At this stage, you may want to invest in something with a little amount of risk-factor as it can fetch you better returns in the long run.
Retirement Planning in the 40s
Finding the right retirement plan may be a little difficult when in your 40s. However, it is not too late. You may start cutting down on your unnecessary expenses and invest at the earliest with whatever little you can. Also, avoid withdrawing from your corpus unless in case of an emergency.
Retirement Planning in the 50s
At this stage, your retirement starts to inch closer to you. If you haven’t done it already then you need to get a handle on your expenses and trim your lifestyle. You must become educated about the options you have now and seeking professional help may assist you. If you plan to stop working in your 50s then you would have to look for ways to earn on a regular basis. When you are very close to your retirement, more than the returns try to maximize your savings. With just 3-4 years to retiring, it is recommended that you steer clear of high-risk investments.
Eligibility and Documents Required for a Pension Plan in India
When purchasing a pension plan, there are some eligibility criteria :
- Entry Age
Most companies fix a certain entry age only after which you can buy a pension plan. Generally, it is 18 years, though there are some plans that can be bought only at the age of 30 years. There is a maximum age of entry as well which is mostly 70 years.
There is a certain amount/charge that you pay on a regular basis/lump sum. The higher annuity that you wish to receive the higher premium you would have to pay.
- Vesting Age
Vesting age refers to the age when you would start receiving the pay-outs of your pension plan. Most companies offer pension plans at the vesting age of 40 years but may differ from company to company.
When buying a pension plan, you need to submit the following documents:
- Age Proof - School Mark Sheet, Voter ID, Birth Certificate
- Identity Proof - Passport, Driving License, PAN Card, Aadhar Card
- Address Proof - Telephone Bill, Electricity, Ration card, Aadhar Card, Passport
- Income Proof - Salary Slip, Bank Statement, ITR File
- Proposal Form - Duly Filled and Signed Application cum Proposal Form
- Medical Reports - Certain insurance providers ask you for a pre-policy medical test
Retirement Planning Investment Tips
You need a plan for your retirement if you want to make it comfortable, here are a few tips that you can follow:
- Keep a check on your spending especially when nearing your retirement
- When buying a plan, don’t go by only the Premium amount. Save a little more today and make your future comfortable
- Inflation and rising prices will gradually decrease the value of your savings, plan accordingly
- Pay attention to your physical health and stay healthy. Following good and clean habits in your youth will ensure take off the burden of medical costs when in old age
- Try to pay off your loans when young. Being loan-free post-retirement can be a blessing
- Speak to your partner about your retirement plan and make a budget that can follow
- Start planning for tomorrow today. The sooner you start accumulating the more secure your retired life can be
Best Pension Plans in India (2021)
Name of the
|Type of Plan
|ICICI Prudential Easy Retirement Plan
|Unit Linked Annuity Plan
|45 years-80 years
|10 years to 30 years
|Aditya Birla Sunlife Empower Pension Plan
|Unit Linked Annuity Plan
|55 years - 80 years
|5 years to 30 years
|SBI Life Saral
|Non-Linked, Participating, Savings Pension Plan with coverage benefit
|40 years - 70 years
Regular Pay- 10-40 years
Single Pay- 5-40 years
Minimum - INR 1 lakh
Maximum - No Limit
|Kotak Premier Pension Plan
|Traditional Participating Pension Plan with insurance coverage
|30-55 years/ 60 years
|45 years - 70 years
Regular Pay: 10 - 30 years
Limited Pay: 10 Pay: 15 - 30 years
12 Pay: 17 - 30 years
Single Pay: 10 yrs & 15 years
|Depends on Sum Insured, term, etc
Minimum - INR 2 lakhs
Maximum - No limit
|HDFC Life Click 2 Retire
|Unit-Linked Pension Plan
|45 years - 75 years
|10 or 15-35 years
|Minimum INR 24,000
|HDFC Life Personal Pension Plus Plan
|Traditional participating pension plan
|55 years - 75 years
|10 years to 40 years
|Minimum INR 24,000
|Minimum sum assured on vesting is INR 2,04,841
What is not Covered in Pension Plans?
- If the policyholder, whether sane or not, commits suicide within 1 year of the beginning of the policy, the nominee would not receive the death benefit
- At the time of policy entering, if the policyholder misinterprets any facts, the policy will be terminated
Pension Plan Tax Benefits
There are various tax benefits that you can avail of when you invest in a pension plan.
- The premiums that you pay towards your pension plan, up to INR 1.5 lakhs annually, can be availed as a deduction under section 80CCC
- The premium that you pay, up to INR 25,000, towards the critical illness rider for every financial year. If you are above 60 years the maximum limit can be INR 50,000
- When you opt for a deferred annuity plan, you can withdraw 60% of your corpus when the plan matures, called the commutation of the pension. This commutation is a tax-free income under Section 10 (10A)
- You can also avail ⅓ of the corpus as a tax-free benefit under Section 10 (10A)
- Irrespective of the premium amount, the death benefit is tax-free, if there is any
- For certain plans with life insurance coverage benefits, according to Section 10 (10D) of the Income Tax Act, 1961 any income that is received from a life insurance plan is tax-free. Nevertheless, to seek this exemption from survival and maturity benefits note that:
- The premium should not exceed 10% of the sum assured if so the entire maturity or survival benefit will be taxable.
Pension Plan Claim Process
When it is time to claim the pension plan, you need to get in touch with the company through its customer care. Though most companies follow an almost similar claim process, there may be a few specific requirements. You need to choose the annuity option at the time of vesting and mention the option in your pension application.
You will have to fill in the Claim Form that can be downloaded from the company website. You would have to attach your KYC documents along with any other documents asked for. Post verification of details, your pension would be processed.
Pension Plan Riders
There are some pension plans that offer optional riders. Most of the riders have similar features but it is recommended that you understand the terms and conditions of the policy that you wish to purchase. The common riders are:
- Term Rider
In case of the death of the policyholder, the nominee would receive the sum assured under the term rider.
- Accidental Death Benefit Rider
If the policyholder is killed in an accident, the nominee will receive a death benefit equal to the sum assured.
- Hospital Cash Benefit Rider
In case of sudden hospitalisation, you will not have to run around arranging funds. A daily allowance will be provided.
Pension Plan FAQs
1. Are government pension plans a good investment option?
Government pension plans invest in mostly low-risk options. These plans are suitable if you do not wish to take any risk with your investments. There are many options available in the private sector too that offer multiple options and attractive returns.
2. When is the right time to buy a pension plan?
The best time to buy a pension plan is Now. The thumb rule of most investments is to start saving as early as possible. So, whether you are in your 20s or your 50s, if you are earning and you haven't bought a pension plan yet, do it today.
3. Is income from a pension plan taxable?
The annuity or pension that you receive is taxable. It is considered as an income and is thus taxable as per the slab it falls into.
4. How much life cover is offered in a Pension Plan?
If opted for, the policyholder will have a life cover, depending on the sum assured, policy term, kind of annuity, etc.
5. How does a pension plan calculator work?
A pension plan calculator is a free, online tool that helps you find out the lump sum amount that you would be able to save for your retirement. You submit details like date of birth, date of retirement, annual income, savings, etc., and tell you the pension amount.
6. Which government pension plan in India is a good option for the post-retirement future?
If you are looking for a government pension plan in India, you can opt for the National Pension Scheme. However, it is only a deferred pension scheme. If you are looking for an immediate annuity plan you can opt for LIC Jeevan Akshay VII.
7. What are the different LIC pension plans?
There are 3 different pension plans offered by LIC now:
- Pradhan Mantri Vaya Vandana Yojana
- LIC New Jeevan Shanti
- LIC Jeevan Akshay VII
8. Which is the best pension insurance plan in India?
There is nothing called the best pension plan, as it depends on your requirements and each person’s requirements vary. Thus, while selecting a pension plan, different factors should be kept in mind and the plan with features that suit you the most should be selected.
9. What is the PM Pension Scheme in India?
Introduced by the government of India, a policyholder can invest in the Pension Scheme to secure his financial future. The money is put in equity and debt funds and returns are generated. At retirement, 60% of the amount can be withdrawn and the remaining is used to purchase the annuity.
10. What is the difference between participating and non-participating pension plans?
In a participating pension policy, you are provided with guaranteed gains, such as death benefit, along with non-guaranteed gains, such as bonuses and dividends, whereas in a non-participating plan only provide guaranteed gains. Due to this, a participating pension plan has a higher premium as compared to a non-participating pension plan.
11. Where to invest for my pension’s future: Pension Plan or PPF?
When thinking about investments, you must plan as per your personal needs and requirements. No two people may have the exact same investment needs. If post-retirement, you are looking for the regular inflow of income, especially post-retirement in the form of an annuity, you may invest in a pension plan. But if you wish to receive money in a lump sum then investing in a PPF may be suitable.
12. How to calculate pension plan corpus?
To calculate your pension plan corpus you can make use of the pension calculator. A pension plan calculator is a calculator that helps you find out the lump sum amount that you would be able to save for your retirement. You need to enter your monthly expenses, disposable income, expected return on investment, etc. you will come to the pension amount that you might need when you retire.
13. What is the difference between a deferred annuity and an immediate annuity?
A deferred annuity has a phase of accumulation. Under this plan, you collect a corpus by regularly investing in a policy. You can pay through a single premium or regular payments throughout the term. When the policy term expires, the collected amount will be given to you. On the other hand, immediate annuity plans offer the pension immediately. There is no waiting period, however, the entry age of the plan may differ among companies. You pay a lump sum amount of money and when you retire, or when the policy term ends, the pension will be paid out instantly.
14. Should I opt for a pension plan, if I already have a provident fund account?
When it comes to saving for the future, the more the better, thus, if your budget allows you can opt for both. Both the plans are considered good and safe option that requires a minimal contribution. However, both options are meant for completely different investment objectives.
Pension Plans of a regular flow of income post-retirement which is taxable in the hands of the annuitant while provident fund offers tax-free and guaranteed retirement but in a lump sum. So, depending on your needs, you need to choose the plan.
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