Types of Pension Plans

Introduction

Securing your future financially is important to ensure stress-free and quality life. In that sequence, retirement and pension plans are a great way to beat inflation and secure finances post-retirement. These plans are an excellent means to ensure security and financial stability for your old age. The sooner you start investing in a plan, the smoother your financial journey becomes.

However, different types of pension plans are available for investment, including deferred and immediate annuities, PPF, NPS, etc. Here is a guide to choosing the right plan to suit your requirements and expectations.

What are Pension Plans?

Pensions or retirement plans are investments in which people regularly invest some portion of their income to accumulate wealth over a period and achieve financial security for retirement. Investing in a plan lets the investors live with pride without sacrificing their living standard post-retirement.

Considering the increasing inflation rates and living costs, retirement planning has become integral to everyone’s life. These plans are beneficial when you need immediate funds to deal with any emergency. Investing in the right plan lets you accumulate wealth and can significantly affect your final aggregation.

Who Should Opt for Pension Plans?

Everyone, regardless of age and gender, should buy pension plans in India to secure their finances post-retirement. Those looking to save money on tax obligations should also consider investing in pension plans covered under Section 80C of the Income Tax Act 1961. These plans provide tax benefits of up to Rs. 1.5 Lakh, helping gain long-term financial security.

Types of Pension Plans in India

Your pension plan differs based on whether you are salaried, professional, or run a business. There is no “one-size-fits-all” concept when it comes to retirement planning. The various types of pension plans available in India include the following:

1. Deferred Annuity: Make a single or regular payment through the policy term and receive a pension after maturity.
2. Immediate Annuity: Pay a lump sum into the plan and start receiving a pension immediately.
3. Pension Plans with Life Cover: These pension plans in India offer life insurance coverage with an annuity option and benefits to the beneficiary after the investor's death.
4. Guaranteed Period Annuity: The plan offers an annuity for 5, 10, 15, or 20 years, depending on its flexibility.
5. Annuity Certain: The investor receives an annuity for a specific period, such as from 60 and 70 years of age.
6. Life Annuity: The investor continues receiving pension until death and the spouse after the investor’s death.
7. Pension Funds: These long-term pans offer higher returns on maturity according to PFRDA regulations.
8. National Pension Scheme (NPS): Regulated by the Indian government, the plan allows equity and debt funds investment. On maturity, you can withdraw up to 60% of the accumulated corpus and invest 40% in an annuity.
9. Employee Provident Fund: Regulated by EPFO, these plans are available for HUFs and salaried individuals. You must contribute a percentage of your income to the scheme, and the employer must match your contribution during the term. Upon retirement, you receive the total contribution amount along with interest.

How to Choose the Best Pension Plan?

With so many types of pension plans available, follow these steps to choose the best one:

• Determine your retirement age, financial goals, and money you wish to receive during your golden years.
• Decide how much you can invest per month based on your current income and post-retirement financial expectations.
• Compare the available plans, check their benefits, and shortlist ones suitable to your financial goals.
• Read the terms and conditions carefully to understand the pension plan and choose one suitable for your needs.

Five Things to Consider When Buying a Pension Plan

Below are the key factors worth considering when choosing the best retirement pension plan:

1. Risk Tolerance: Risk appetite is crucial when selecting an investment plan. Those with low-risk capacity must choose low-risk plans offering fixed return rates without any market connection. However, those with a high-risk appetite may consider investing in market-linked plans providing higher returns.
2. Life-Stage: Young individuals with high-risk appetites may consider investing in market-linked pension plans. As they age, their willingness to risk their savings may be affected.
3. Tax: Tax liabilities and benefits are other important factors when choosing a retirement pension plan.
4. Fees: Review the expenses and costs associated with the retirement plan as they affect the overall gains.
5. Investment Horizon: Consider the investment horizon before choosing a retirement plan. The longer the investment horizon, the more time it takes to grow.

How Much Should You Invest in a Pension Plan?

How much you invest in a retirement pension plan depends on various factors, including your current age, retirement age, desired lifestyle post-retirement, and other income sources after retirement. While pensions can be a reliable income source for retirement, saving additional funds is still essential to ensure financial security.

According to a common rule, you must save at least 10-15% of your annual income, including employer contributions to your retirement account. However, the particular amount you must save varies based on your circumstances. A financial advisor can help create a personalised retirement plan while considering your pension and other income sources.

Choose the Right Pension Fund after Understanding Your Investment Needs

Selecting a retirement pension plan according to your investment objectives and risk appetite is important to achieve the desired returns. Here is a comparison of various pension funds and their investment strategies:

• National Pension Scheme (NPS)
  • Investment Horizon: Until 60 years
  • Minimum Investment: Rs. 1000 with no upper limit
  • Investment Instrument: Debt and equity funds
  • Returns: Based on the fund’s performance
  • Withdrawal: 60% as a lump sum and 40% in an annuity
  • Tax Deductions: Deductions under Section 80C of the Income Tax Act, 1961 (ITA)
• Public Provident Fund (PPF)
  • Investment Tenure: 15 years
  • Investment Limit: Up to Rs. 1.5 Lakh per year
  • Tax Deductions: Deductions under Section 80C of the Income Tax Act, 1961 (ITA)
  • Returns: Based on profits from government securities
• Employee Provident Fund (EPF)
  • Investors: Salaried employees
  • Contributors: Investors and their employers
  • Interest Rate: Set by the EPFO (Employees' Provident Fund Organisation)
  • Withdrawal: 100% of the contribution amount at maturity with interest
• Annuity plans
  • Benefits: Life cover with a regular income stream
  • Types: Deferred and immediate
  • Payout: Immediate for an immediate annuity, delayed after maturity for a deferred annuity

How Do Different Pension Plans Affect Your Investment Amount?

Different pension plans in India require different investment amounts. Here’s a brief analysis

• PPF: Maximum investment amount of Rs. 1.5 Lakh per year
• ULIP: Maximum investment amount of Rs. 2.5 Lakh per year
• NPS: No maximum investment amount, but a minimum investment of Rs. 1000 per year

Conclusion

Retirement planning is an important part of managing your finances post-retirement. Rather than relying on your investments and savings, you can use these retirement and pension plans to retain your self-respect during your golden years. So, plan your retirement judiciously and spend your retirement years peacefully.

Frequently Asked Questions

What are the three most common pension plans?

NPS, PPF, and annuity are the most common pension plans in India.

What are the three types of pension?

Three types of pension plans worth considering are those with and without life cover, immediate and deferred annuities, and traditional and unit-linked plans.

Which pension plan is best?

NPS is the best retirement pension plan because it offers unmatched flexibility, high returns, a mix of lump sum withdrawal and annuity, and attractive tax benefits.