Employment based Pension Plans
When you are in employment, the part of your salary is deducted and deposited in the government scheme called EPS (Employees Pension Scheme) every month. The employer also contributes to the employee's EPS account as per government rules. Over the years, the corpus is accumulated as a large sum. After your retirement, you will get the pension amount every month through your EPS account.
With the rise in inflation and lifestyle related expenses, the pension amount received from EPS scheme is found miniscule for many people. It is not sufficient to meet your monthly expenses. Hence it is recommended that you can consider buying other types of retirement plans in addition to EPS pension.
Government Retirement Plans
National Pension Scheme
The central government has created a dedicated body called PFRDA(Pension Fund Regulatory and Development Authority) to administer a country-wide pension scheme, called NPS(National Pension Scheme).
The scheme consists of two tiers. Tier-1 is the mandatory account, in which the subscriber has to deposit a minimum amount of Rs.6000 every year. There are withdrawal restrictions in this account. You cannot withdraw any amount from a Tier-1 NPS account till it matures to 10 years. After the same, you can withdraw 25% of your corpus, only for specific purposes. Over the years, the fund gets accumulated with compounding effect. When you attain 60 years of age, you can withdraw 40% of the accumulated fund. For the balance amount, you can buy the annuity to avail regular pension income. You can select a monthly, quertery, six-monthly or annual option to receive the regular pension.
On the other hand, the Tier-2 account offers much more flexibility to invest and withdraw your fund. You can freely invest your surplus money in this account and use the money as and when you need it.
For both the accounts, you can select either “Auto Choice” or Active Choice”. If you have opted for “Auto Choice”, based on your age, the fund is bifurcated between equity and debt automatically. You don't have to take any further action. If you have opted “Active Choice”, you will have an option to select your portfolio. You can opt for either 50% debt and 50% equity, or debt only or equity dominated portfolio. You can choose different or same choices for your Tier-1 and Tier-2 accounts.
Your investment in a Tier-1 account brings attractive tax benefits for you. The investment upto Rs.150000 qualifies for your 80CCD (1) deduction. Moreover, you can claim an additional deduction of Rs.50000 under section 80CCD(1)(B). Hence, your actual investment reduces by the amount equivalent to tax savings. It gives you a higher real rate of return indirectly.
Public Provident Fund
Although PPF (Public Provident Fund) is not declared as a pension plan, it serves all the purposes of the pension plan, if managed properly. Being a government backed scheme, it provides sovereign guarantee for your hard earned money.
You can invest yearly Rs.1,50,000 in your PPF account. The money keeps on growing with an attractive interest rate. You can withdraw the entire amount after 15 years of tenure and buy the annuity plan from any PFRDA recognised pension companies. Such an annuity plan will give you a monthly pension for life.
In case you are still in your active working life after completing 15 year tenure, you can extend your PPF account for the block of five years. You can extend the account multiple times.
Moreover, when you invest in a PPF account, you can avail tax benefits under section 80 of the income tax act. Hence, your real investment is much lower than what you actually invest in your PPF account.
Pradhan Mantri Vay Vandna Yojna (PMVVY)
Popularly known as PMVVY, or Pradhan Mantri Vay Vanda Youjna is most suitable for senior citizens having lump sum corpus after retirement. You can invest upto Rs. 15 lacs in this scheme. The entry age for this scheme is 60 years.
The scheme is administered through LIC and backed by the government. Hence, it ensures steady, guaranteed stream of pension once you invest lumpsum amount in this scheme.The assured rate of interest is 7.40% per annum for the financial year 2020-21. The interest rate is reset in the beginning of every financial year. Once invested, you can avail regular pension income under this scheme. You can choose the option to avail the pension on a monthly, quarterly, half-yearly or yearly basis.
Senior Citizen Saving Scheme (SCSS)
As the name suggests, any senior citizen of above 60 years can invest in this scheme upto Rs. 15 lacs and avail regular pension. The pension amount is credited directly into the bank account of the senior citizen at the end of each quarter.
Like PMVVY, this scheme is also backed by the central government. Major benefit in investing with SCSS is stability of interest rate. Once you lock-in your fund at a particular interest rate, it remains constant during the entire term of the scheme. The current interest offered in the scheme is 7.40% per annum. The scheme tenure is of five years and can be extended for further three years once it matures.
Insurance based Retirement Plans
The insurance based retirement plans are the combination of pension income and death benefit both. These plans are offered by various insurance companies and can be availed directly by the individual. Hence they are also known as personal pension plans. The major types of personal plans are as below:
Deferred Annuity Retirement Plan
Under such a plan, you can begin receiving a pre-decided pension amount every month, once you attain the specific age. While you subscribe to such plans, you will have an option to select a debt plan (low risk product) or capital market plan(equities and bonds). The debt plan is suitable for conservative investors/ The capital market plan is expected to give high return, with higher exposure to the market risk.
The key feature of deferred annuity is the wealth accumulation through power of compounding. Due to the waiting period, your corpus gets the time to grow. After the waiting period is over, you will get a higher pension amount, even if your original subscription was very small.
Immediate Annuity Plan
This plan is most suitable for those who have recently retired with lump sum retirement benefits like gratuity, leave encashment, bonus and other similar proceeds. The retired person can park the lumpsum amount to purchase an immediate annuity plan that gives you a regular pension amount from very next month.
The key advantage of this plan is proper management of your retirement benefits. Once you retire from a long service, you will receive a lump sum amount, that is quite larger than your monthly salary. Hence there is a tendency to utilise this money for unproductive purposes. Later on, you may end up with shortages of funds to meet your daily, routine expenses. The immediate annuity plan is the perfect answer to avoid this situation. You can park your entire retirement proceeds safely to buy an immediate annuity plan and ensure your monthly pension income for the entire lifespan.
Pension with insurance cover
These plas are the combination of regular monthly pension and life cover. Upon the unfortunate death of the policy holder, the nominee receives death benefits from the insurance company. The subscriber gets pension income till his or her lifespan.
Pension without insurance cover
These plans are plain pension plans, that provide you income till your lifespan. However, no death benefits are covered under these plans. The key benefit is, these plans are available at substantially lower cost as compared to combination plans. If you have already availed other insurance cover like term insurance with sufficient sum insured, you can opt for this plan and ensure regular pension after your retirement.