What are the types of Pension Plans in India?

22 Sep 2021  Read 945 Views

Secure aspects of your future by investing in retirement plans and ease yourself from unwanted misery; because, let’s face it, hoping to win a lottery is, in no way, a future bet. No matter how hard you try, you cannot stop what might come your way. This makes retirement plans highly vital to your financial independence after you retire.

With a refined plan, you can be excited about your retirement, unlike most who are unaware of the benefits of investing in pension plans.

Now, you may also wonder which, among an array of plans, you must choose. Well, worry not you, for a descriptive list of retirement plans is ready for you.

What is a Pension Plan?

It is a retirement fund paid to an individual as an annuity when they stop working permanently due to old age or some illness. (It still counts as hard-earned money, okay!)

The individuals need not depend on someone after retirement as these plans will assure a steady income after retirement. (What a relief!). It also helps in tax planning as some pension schemes are exempted from tax under Section 80(C). These plans allow individuals to pay either monthly or as a lump sum amount. (more generally, the former)

You will gradually build a sizable sum by contributing a certain amount to your pension plan every month/year. This will ensure that you have a consistent stream of income once you retire. Isn’t that easy-peasy lemon-squeezy? Yeah, of course! So, it is essential to start investing in the early years of your career to have a vast amount of wealth in the golden years.

Factors to consider while choosing Pension Plans

One should look for the liquidity terms. Usually, these plans have low liquidity. However, some schemes allow withdrawal in case of emergency.Then they need to check the vesting age, the age at which they will start receiving a pension, and then check for how long the amount will be received.

Pension plans (and retirement planning, in general) are quite a subjective matter. There is no sure-shot answer to how much funds a person might need to retire early. It has to depend upon your current financial position, age, risk profile, and goals you have planned for the future. Yes, we know, to note down all of this and chalk out a suitable strategy for retirement is anything but a cakewalk. This is possibly why many people refrain from it. But, not anymore!

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Types of Pension Plans

Following are the common types of pension plans:

  • National Pension Scheme (NPS)

This scheme is regulated by PFRDA (Pension Fund Regulatory and Development Authority) under the jurisdiction of the ministry of finance and the Government of India.

Under this scheme, the funds are invested in a combination of debt and equity to earn better returns as per the individual's choice. After retirement, it gives a choice either to withdraw the whole amount at once or to pay as an annuity. Another option is to take some amount in a lump sum and the remaining in the form of an annuity as a regular income.

National Pension Scheme attempts to improve pension regulations and instill in residents the habit of saving for retirement.

  • Annuity Plans

There are two options under the annuity plan: immediate and deferred.

Under immediate annuity, you pay a lump sum payment and immediately begin receiving an annual or monthly allowance with instantaneous annuity programs. Appealing, isn’t it?

Deferred plans allow you to invest a single sum or make recurring payments over a certain period. A suitable facet of this scheme is the tax benefit. The annual or monthly annuity is only paid when a certain period has passed.

In both the schemes, the annuity payment can be made for a certain length of time or the rest of your life.  And in case of the beneficiary’s death, the amount will be paid to the nominee. No losing money here!

  • Pension Plans with/without Life cover

Under pension plans with life cover, there is a double benefit of pension and life insurance. In case of the individual’s death during the accumulation time, the beneficiary will receive the cover. Otherwise, this will remain as a standard annuity for the post-retirement period.

While under one without life cover, there will be no cover for the individual's death during the accumulation period.

  • Annuity Certain

Under this scheme, the policyholder will receive the amount (annuity) for a specific period. The beneficiary can decide the period as per his need and convenience. And in case of the beneficiary’s death, before getting the full payment, the nominee will receive the remaining amount.

  • Life Annuity

Here, the policyholder will receive the annuity till death. And if the spouse is also selected in the scheme, and in case of the policyholder’s death, the annuity will be paid to the spouse. Here, the policyholder can pay a premium on a regular basis or as a lump sum amount.

  • Pension Funds

These are the funds for the employees to plan for their retirement. It pays for the commitments of the employees. It is presumed that the returns of this scheme are comparatively better than others if held till maturity.

  • Whole Life ULIP

ULIPs are unit-linked insurance plans. Here, the money remains invested for the whole life which can earn returns, and money can be withdrawn as per the convenience of the beneficiary. This policy stays in place till the beneficiary is alive. And in case of demise, the benefits and coverage are forwarded to the family members of the nominee.

The policyholder also gets the tax benefit under this scheme as the premium paid for this policy is exempted from tax under section 80(C). 

Tips to keep in mind while investing in a Pension Plan

Here are a few tips you should follow while investing in a pension plan:

  • Decide your financial goal and the financial liability you may have after retirement.

  • Decide how much you require to live with the same standard of living even after retirement.

  • Choose the plan according to your financial requirement and income level.

  • Check whether the plan meets the criteria mentioned above.

  • Choose the best plan available and start investing.

  • Pro-tip: let us do it for you, Sign up to Recipe!

Conclusion

The booming economies come with the downside of the increased cost of living due to inflation. Hence, pension plans work to aid you against having to compromise your needs after retirement.

Having talked about so many retirement plans, we’re sure that we helped you gain some insight to safeguard your future. Select wisely and go with what suits your lifestyle in the best way.

Remember what we keep saying: ‘Your parents aren’t your emergency fund and your children aren’t your pension fund!’ Get one for yourself and secure your future.

Happy Investing!

About the Author: Kanishka Tayal | 9 Post(s)

Kanishka is a finance enthusiast, currently pursuing her master's in Banking and financial services domain. She loves to doodle in her spare time. She is a keen learner and is willing to pursue her career as a financial analyst.

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