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Retirement is an opportunity to set oneself free, at least from financial obligations. Though one cannot entirely avoid family financial commitments, all one can do is ensure one can navigate their retirement life by investing in the right pension plan with the help of a retirement calculator. And that is the entire purpose of pension schemes in India! As a result, you must educate yourself on pension plans to retire early and enjoy your retirement. So, here’s a beginner’s guide to pension plans in India.
What is a pension plan?
Retirement planning allows you to build a nest egg so that you and your family can maintain the standard lifestyle you are living now even after your retirement. How much of your retirement fund you would need based on your income and goals can easily be calculated using a retirement calculator. Most of the pension plans are set up to provide a regular stream of income for a set term or until death. Several types of pension plans provide a variety of advantages, including pension plans that come with a life insurance component.
Features of a Pension Plan
Before investing in a pension plan, you need to understand how it functions to make the best use of it.
- Accumulation phase: A pension plan will begin with the accumulation phase. To accumulate the retirement corpus throughout the policy, you must pay a premium regularly. The longer the accumulation period, the higher the retirement corpus. There is no such thing as the right retirement corpus. You can use a retirement calculator to find out how much premium you need to pay for the corpus. As a result, if you begin investing early on, you can choose a longer policy term.
- Annuity phase: You can buy an annuity with the retirement funds you earned at the end of the accumulation phase. The annuity plan will give a consistent income over a set period. As a result, you pay for the annuity, and it will meet your financial needs until you die.
Types of Pension Plans
Several types of pension plans are available in India. It is provided by life insurers, employers, and the government. When you are doing the retirement planning, it is important to look at the most popular pension plans:
- Immediate annuity plan: As the name suggests, this type of plan starts to provide monthly income immediately after retirement. It is an excellent pension plan for seniors who have recently retired.
- Deferred annuity plan: When purchased, the annuity plan begins giving regular income on a deferred date.
- Annuity certain: An annuity plan offers the annuitant a regular income for a certain period. In the event of their sudden death, the plan will pay the annuity amount to the beneficiary.
- Life annuity: The annuity plan determines the annuity payment till your death. You can even choose to extend it till your spouse dies in your absence.
- Life insurance pension plans: Insurance companies provide annuity-based pension plans that provide a variety of advantages. Furthermore, the rider options allow you to improve the protection by assisting your nominees in receiving additional funds in case of your unexpected accidental death or waiving future premium payments in case of total and permanent disability. Additionally, the numerous premium payment options let you tailor the plan to your income and financial needs. You can use the retirement calculator to estimate the premium accurately.
- NPS: The National Pension Scheme is a government-provided pension scheme designed to encourage people to save money regularly over time. The accumulated funds will be invested in both debt and stock markets. At maturity, 60% of the corpus will be available for withdrawal, with the remainder invested in an annuity plan.
- Pension funds: These solutions are government-assisted retirement savings alternatives. It is secure and overseen by the Pension Fund Regulatory and Development Authority.
Why must one consider purchasing a pension plan?
One needs to consider Pension plans to cater to changing lifestyle situations such as:
- Inflation: As the rate of inflation rises, you should be prepared to pay for your daily needs after retirement. The annuity plan will generate a steady stream of income that helps you sustain your lifestyle even after you stop working.
- Increasing health complications: As you become older, you’ll need to set aside funds to manage medical expenses. While one may argue that their standard health and life insurance rider would work, sometimes those plans come with some limitations like waiting periods that don’t allow you to fully enjoy the insurance benefits. This is where you can use funds from pension plans as you see fit.
- Tax Benefit: Under the Income Tax Act of 1961, your investment in pension plans is eligible for tax deductions and exemptions. Investments up to ₹1,50,000 are permitted for deduction under Section 80C, particularly for annuity pension plans offered by life insurance firms. In addition, there is a ₹50,000 deduction for NPS investments. You can save up to ₹2,00,000 by investing in pension plans.
Conclusion
The whole purpose of purchasing a pension plan is to ensure you get a steady source of income during your retirement years. Retirement planning when done right helps you invest in the right pension plan. Annuity pension plans from life insurance companies not only provide an insurance component but give life insurance to protect your family’s financial future.