The pension plans, or retirement plans are nothing but systematic and long term planning for the regular income throughout your lifespan. During your working age, say from 25 years to 60 years, you receive regular income through salary or business or self-employment. With ageing, the working capacity (and hence earning capacity) of the individual reduces, barring a few exceptions. However, the need for regular income does not reduce in the same manner. You will need money throughout your life to fulfill routine needs. Hence, it is prudent enough to save and invest properly during your working life and avail the regular income during your retirement life. The pension plan does exactly the same. You can invest a fixed portion from your salary every month and build the corpus till your retirement age. Once you retire, you can avail the combination of lump sum amount and monthly pension, depending on the type of pension plan chosen. The following are popular pension types for your review.
National Pension Scheme
It is the pension plan conducted by the central government, through a dedicated office called Pension Fund Regulatory and Development Authority (PFRDA). With additional tax benefits under section 80CCD of income tax act, the scheme has become very popular in recent years.
During your working life, you can contribute to the scheme to generate the corpus. The scheme consists of two tiers for the investors. The investment in Tier-1 is mandatory for every subscriber. The subscriber has to invest Rs. 6000 per year as minimum subscription towards NPS in Tier-1. There are also withdrawal restrictions for Tier-1. After 10 years of contribution, you can withdraw the amount upto 25% of the corpus in Tier-1 in case of an emergency. Once you attain the age of 60 years, you can withdraw the amount equivalent to 40% of the corpus tax free. For the balance amount, you can buy the annuity to avail regular income. The subscriber can avail monthly, quarterly, half-yearly or yearly pension income based on the plan chosen. The subscriber can avail the annuity services from any of the service providers authorised by PFRDA.
On the other hand, Tier-2 is voluntary and offers complete freedom for investment and withdrawal. You can choose the right mix of debt and equity as per your risk appetite. There are two choices offered to the investors: Auto Choice and Active Choice. Under Auto Choice, the proportion of debt and equity is decided based on the current age of the investors. There is no need to give any intimation by the investor once the “Auto Choice” option is selected. The option of “Active Choice” provides freedom to select the proportion of debt and equity. The investor can also change his choices once in each financial year.
There are lucrative tax benefits against your investment in NPS Tier-1 account. You can avail the deduction up to Rs. 1,50,000 under section 80CCD (1). Moreover, section 80CCD1(B) allows you to avail further deduction of Rs. 50,000 in addition to Rs. 1,50,000. If you are in a higher income tax bracket, you can avail considerable tax benefit through NPS.
The government body PFRDA (Pension Fund Regulatory and Development Authority) has authorised six pension fund companies that you can choose from. As a subscriber, you can choose the amount to be invested every month and the duration for which you would like to keep on investing. During entire term, your money keeps on growing based on market return. At the end of tenure, either you can avail the lump sum amount or you can buy annuity to avail regular pension income. You can also choose the frequency of your pension like - monthly, bi-monthly, quarterly, half-yearly or yearly. As compared to NPS, these funds give you more flexibility in terms of amount and years of subscription. Usually, liquidity is also high in case of emergency requirement after certain years of subscription.
Immediate Annuity Plan
Under immediate annuity plan, you can invest lumpsum amount with the pension fund company and start receiving regular pension immediately. You can choose the frequency of pension as per your choice - monthly, quarterly, half-yearly or yearly. This plan is most suitable for the recently retired person, who has received a lump sum amount of gratuity, leave encashment and other retirement benefit from the employer.
The scheme offers dual advantage: First, even though your salary stops coming, your income continues in the form of pension from the next month. Second, your retirement corpus is invested in a proper and planned way to give you lifetime income.
The amount of pension depends on factors like amount invested and the scheme opted as below:
Pension amount for entire life with no benefit after death :In such a case, you will get substantially higher monthly payment, as the insurance company doesn't have to pay after the death of the pension plan subscriber.
Pension amount for entire life with lumpsum amount return to the nominee :This scheme provides lumpsum amount to the nominee of your choice after your death.
Pension amount for entire life with pension to the spouse after death :This option is most popular, as it covers the expense of the spouse after death of the subscriber.
Pension for fixed number of years :Under this option, you can get a higher amount of pension for the next five to ten years. After this duration, you will not get any pension even if you survive after this duration.
Deferred Annuity Plan
As the name suggests, the annuity in such a plan does not start immediately after the payment of the last premium or lump sum premium payment. The idea behind such postponement is to give more time to your accumulated corpus to grow. There may be situations, when you might have completed a predetermined number of years of premium payment, still you might be earning the income from your job or profession. In such a case, you might not need the pension income immediately. You can opt for a deferred annuity plan that helps your corpus to grow with time. The biggest advantage of such a plan is, you will get a substantially higher amount of pension, as compared to immediate annuity plan.
Pension Plan with Life Cover
The pension plan with life cover gives dual benefits under one plan. The part of your premium is used to purchase life insurance cover. The other part is considered as a subscription towards pension fund. At maturity, you can receive a lump sum amount accumulated during your working life. You also have an option to avail regular payments in lieu of lump sum payment. In case of unfortunate event of death of the subscriber, the nominee gets the following benefits :
- Waiver of premium payment after the death of policy holder
- Option to avail lump sum amount to the nominee
- Option to avail regular pension payment to the nominee
- Return of premium paid
- Depending on the plan, the nominee can also avail one part as lump sum payment and the other part as regular pension, both.
Unit Linked Pension Plan
The unit linked pension plan invests the money in stocks and bonds. The return from the same is largely dependent on market performance. In the long term, equity is believed to give a higher return. However, the person with conservative risk appetite should stick to a traditional (regular) pension plan.
Features and Benefits of Pension Plans
The regular monthly income is the essence of maintaining lifestyle, whether you are working or not. During working life, it is comparatively easy to meet routine expenses from the current salary or income. However, the same is not true once you stop working. In such a case, the pension income provides you continuous flow of income throughout your lifespan.
When you subscribe to a pension scheme, you will get a deduction from the income under section 80CCD (1) and 80CCD(1B). The benefit is more for people under the higher tax bracket. Effectively, it reduces your present cash outflow. Moreover, your subscription amount is reduced indirectly.
There are many investment options to the investors like stocks, mutual funds, bank deposits and similar others. However, there is an involvement of risk to get the money back depending on prevailing market conditions. On the other hand, the pension schemes are regulated and approved by the government body. It ensures that senior citizens get the pension irrespective of market risks.
It is the age of an individual when he or she starts receiving the pension income. Earliest vesting age is 45 years for most of the pension plans. Many pension plans allow you to extend the vesting age upto 80 or 90 years. The key benefit to extend the vesting age is a higher pension at later age. Your accumulated fund gets more time to grow by the power of compounding.
The accumulation duration is nothing but the number of years between the first premium payment and vesting age. For example, if you start subscribing to a pension plan at the age of 25 years and the vesting age is 60 years, your pension plan’s accumulation duration is 35 years. This is the time during which a fund has a chance to accumulate and grow.
It is the period during which actual premium is paid. It could be same as accumulation duration or it could be different also. Many times, after paying period of certain years, the subscriber chooses to ‘defer’ the annuity to avail a higher pension at a later date. Hence, accumulation period increases, however the payment period is only upto last premium payment date. Usually, a longer payment period ensures a better pension amount at the cost of a lower premium amount.
In a very unlikely and undesirable event, you might want to discontinue with your pension plan prematurely. You might have paid the premium for a few years, however would not like to continue anymore. In such a case, you might be eligible to get the amount return, called surrender value. However, such a surrender value is substantially lower than the expected financial benefit of a regularly served pension plan. Unless unavoidable compulsions, the individual should not surrender his or her pension plan.
The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale
Consult with your financial advisor before making any decisions on insurance purchase.
*Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time’