A pension scheme in India is an excellent way to safeguard your finances after you reach your retirement. Luckily for you, several pension plans are available in the market these days. In this article, we will tell you how to choose the right one.
What is a pension plan?
If you are planning to secure your post-retirement financial future, you first need to understand a retirement plan. Also known as a pension plan, these schemes are designed in such a way that they invest a portion of your regular income in certain plans to help in wealth creation over the investment period. The main purpose of a pension scheme in India is to give you an steady monthly income after you have retired.
It is crucial to invest in a pension plan even if you have savings in your bank account. Investing in these plans will provide continued support, even if other sources of income are no longer there. An investor invests in a pension plan by paying regular premiums till they retire. Then, once they have retired, the retirement plan kicks in and starts giving them annuities until their death or the nominee.
Tax benefits of a Pension Plan
According to section 80CCC, contributions of up to Rs. 1.5L made towards a pension scheme in India is eligible for tax deductions. However, the withdrawals made under this scheme are not tax exempted. Therefore, the investor’s money paid as an annuity is subject to taxation as per the prevailing tax laws.
Types of pension plans
National Pension Scheme
These plans are for those investors who want to build their savings over the investment period. They can choose to invest their money in debt or equity markets as per their risk appetite. The investor can withdraw up to 60% of their funds at the time of retirement. However, the remaining amount is paid towards buying an annuity scheme.
Deferred Annuity
This pension scheme in India accumulates a corpus of funds by paying a single premium or a sum of regular premiums throughout the term. You will start receiving the pension after the policy term is over. The tax benefit of this plan is limited to the money you invest. However, the withdrawals are subject to taxation.
- Pension Funds
According to the Pension fund Regulatory and Development Authority, only six companies can operate as fund managers for this pension scheme in India. However, these plans offer great returns on investment as a maturity benefit.
- Immediate Annuity
In this pension plan, the pension starts coming in as soon as you deposit a lumpsum amount. It is based on the amount you invest in. The premiums you pay towards immediate annuity are tax exempted.
- Pension Plans with and without cover
If you choose a pension scheme with cover, then you get a retirement benefit with an added layer of life coverage. On the other hand, without coverage plan does not offer life cover.
- Annuity certain
In this plan, the policyholder is paid an annuity for a specific number of years. The investor can choose that period, and in case of their untimely passing, the policy beneficiary will receive the benefit.
6.Life Annuity
These types of annuities are for a lifetime. However, if the investor dies and has opted for the “with spouse” option, then the pension amount will be given to the partner.
Things to look for in your pension plan
Here are some things you need to consider when looking for a pension scheme in India:
– Safe investment
When you invest in a pension scheme in India, your money is either invested in secure government securities or debt/equity funds based on your risk profile and preference. At the end of the day, your pension plans should be able to generate a guaranteed income for you and your spouse to live a financially independent life after retirement.
– Added benefits
Some pension plans offer added benefits, such as a loyalty bonus after a period of time. This will help you generate more wealth for your retirement fund.
– Flexible payout options
Based on your age and the plan you invest in, you can either invest the entire amount in one go and get pension payments right away or opt for a deferred annuity scheme that creates wealth by adding interest to your corpus before the payments begin.
– Life insurance cover
You can also choose a pension plan that does not offer a lump sum amount at the investor’s retirement or the death benefit in case of their death, whichever comes first. This means that you can invest in a pension plan that doubles up as a life cover.
– Guaranteed income
When you invest in a pension scheme in India, only 1/3rd of your investment is accumulated as corpus, which is paid as a lump sum amount during your retirement. The remaining 2/3rd is used to generate a steady income. Therefore, you should look for a plan that gives you guaranteed income.
Now that you know everything there is to know about a pension plan, be sure to invest in the right one.
