Over the years, pension plans have emerged as a popular means of securing one’s financial standing after retirement. Essentially such plans are designed to facilitate employees accumulate funds throughout their active working years to aid their earnings once they retire. Pension is indeed a key part of effective financial planning for individuals who wish to lead a financially independent and secure life years after retirement and help continue leading a comfortable lifestyle.
To facilitate this, several governmental and private institutions have extended various pension plans that one can benefit from. That said, let us explore more about pension plans to know how to use the same for one’s benefits and strengthen finances accordingly.
What is a Pension Plan?
A pension plan is a long-term investment plan that allows employees to save money for a secured financial future. It allows individuals to park a small amount of money at regular intervals to accumulate enough funds to lead a financially secured life post-retirement.
Having a pension plan is a must for a sound retirement plan as it ensures a steady flow of income even after one has left their job and is leading a peaceful life at home.
Besides having substantial savings, one must always consider having a pension plan for added financial security. Depending on one’s financial goals and lifestyle requirements, one can opt for a suitable pension plan and ensure an independent and comfortable retired life.
On that note, let us check the different types of pension plans in India to understand which one caters best to your goals.
Types of Pension Plans in India
There are eight distinct categories of pension plan in India, and they are categorized as per their structure and accompanying benefits.
The different categories of pension plans are discussed below –
A pension plan under the deferred pension scheme lets individuals save and accumulate a stable corpus via regular premium or a single lump sum payment over the policy term.
The pension is offered to the policyholder after the end of the policy tenure. Notably, this type of pension plan extends several perks, including tax benefits.
Under this scheme, the policyholder is offered a pension immediately. Typically, the plan holder is required to pay a lump sum amount, and in turn, they receive a pension against the amount.
Under this plan, the annuity is provided for a given number of years. Pension plan holders can opt for a period they deem most suited. If they pass away before getting the full payment, the annuity will be paid to their nominee.
4.With and Without Cover
Typically, pension plans with cover come with a life cover component. After the policyholder’s death, the pension plan provider pays a lump sum amount to the beneficiary. Notably, the cover amount is not very substantial as a large part of the premium is paid to grow the corpus and not to cover the holder’s life risk.
5.Guaranteed Period Annuity
In the case of the pension plans under this type of scheme, the annuity is offered to the plan holder for specific periods, say, 5 years, 10 years, or even 20 years. The payment is made regardless of whether the insured survives the period or not.
For this category, the pension plan holder receives payment until death. In case of the plan holder’s death, the pension can be extended to their spouse, given the option ‘with spouse’ has been closed.
7.National Pension Scheme (NPS)
This is a government-backed scheme that aims to secure the financial feature of individuals post-retirement and helps make them independent. Based on the individuals’ preference, the money parked into the scheme is invested in debt and equity funds for better returns. Notably, one can withdraw 60% of the corpus at retirement, while 40% is used to buy an annuity. However, the proceeds received at maturity is not exempted from taxation.
This is a long-term scheme that offers comparatively better output on maturity. Notably, it is regulated by the Government under PFRDA or the Pension Fund Regulatory and Development Authority.
9.Whole Life ULIPs
Whole Life ULIP or Unit Linked Insurance Plan option allows the amount of money to stay invested for the entire life of the insured. Once retired, the policyholder can initiate withdrawal and avail of tax-free income. Notably, this type of pension plan allows users to make additional withdrawals as and when needed.
Schemes under this plan come with a fixed and pre-determined retirement income the employees will receive. The amount is decided based on their earnings and the number of years they have served the employers. Both employers and employees can make contributions towards this plan easily.
Notably, in the schemes under this type of pension plan, the retirement income is not guaranteed, but the contributions are. In it, the contributions made by the employer and employees may be matched.
Things to Check when Getting a Pension Plan
Before getting a pension plan, make sure to check the following features to make an informed choice and maximize the accompanying benefits.
It’s the fixed amount of money that the pension plan holder will receive throughout their life tenure. Notably, an annuity can be immediate or deferred based on the type of pension plan.
- Sum Assured
It is the definite amount of money that is offered to the nominee of the pension plan. The money is offered at the end of the plan tenure and is usually 10 times the pension plan’s fund value or annual premium.
- Accumulation Period
It is the total time period throughout which an individual pays a regular premium toward the plan.
- Vesting Age
This is defined as the age when the pension plan holder starts getting a monthly pension.
It’s the period when the person starts getting payouts from the pension plan after retirement.
- Surrender Value
It is defined as the amount of money that the pension plan provider will pay the plan holder if they surrender it before the scheduled maturity.
Keeping these features in mind helps to compare them when looking for a suitable pension plan and helps pick the one that best suits one’s needs and requirements.