Retirement and pension are closely associated. For many retirees, pensions represent a primary source of income. While pensions can be earned from work, especially in government jobs, planning for it yourself is crucial if your employer does not provide the option.
Pension plans allow you to strategically plan for your retirement. Offered by life insurance companies, pension plans provide retirement-centric financial benefits, ensuring you remain financially independent throughout your life.
Let’s understand more about pension plans in India-
What is a pension plan?
A pension planis a type of life insurance product that provides you with financial security in retirement. It helps you save for future needs such as healthcare, housing, and more during your post-retirement years. Pension plans also offer life coverage, protecting your surviving family members in your absence. They are most commonly structured as annuity plans.
How do pension plans work?
Pension plans allow you to invest a fixed sum of money, which grows over the years. At maturity, you can withdraw your money as regular income, similar to receiving a monthly salary. Pension plans can be purchased with a single lump sum payment or through regular instalments over a deferred period. These are known as immediate annuity and deferred annuity plans.
Pension plans typically have two phases – accumulation and vesting. In the accumulation phase, you actively contribute money to the pension plan. This phase continues until you reach retirement and are ready to withdraw your funds. The vesting phase starts after you retire. During this time, you withdraw your funds. Your withdrawals are a combination of both your contributions and any investment returns generated on the contributions.
What are the benefits ofpension plans in India?
Below are five benefits of investing in pension plans:
1.Financial independence in your old age
Pension plans ensure that you have enough funds to cover all your essential and non-essential financial needs in retirement. They help cover healthcare, food, housing, as well as expenses for travel and hobbies. Essentially, pension plans act as a substitute for your pre-retirement income and ensure that your lifestyle remains stable after retirement. They allow you to continue pursuing your passions and enjoy a fulfilling retirement.
Moreover, with regular income, you remain self-reliant even as you age, and have the freedom to live life on your terms because of your financial independence.
2.Life cover for your loved ones
Pension plans, such as annuities offered by life insurance companies, provide a life cover that is given to the nominee in the absence of the policyholder. This assurance can be invaluable for retirees with dependents. If your spouse is financially dependent on you, they can use the money to support their financial needs in your absence. Additionally, if you have children or grandchildren, they can use the funds to pursue their goals and better their lives.
3.Systematic savings and withdrawals
Pension plans allow you to systematically save for your future needs. If you need immediate funds and are retiring soon, you can choose to invest in an immediate annuity plan. Alternatively, if you plan to retire in a few years, a deferred annuity plan allows you to invest for a specified period and withdraw funds later when you retire. This systematic approach ensures that you can prepare for retirement according to your specific timeline and needs.
Withdrawals from pension plans are also structured systematically. You can withdraw the accumulated funds upon retirement and receive fixed monthly payments for a predetermined term.
4.Additional savings through tax benefits
Pension plans qualify for tax benefits under the Income Tax Act, 1961. The premium paid towards a pension plan offered by a life insurance company can be claimed as a tax deduction subject to conditions under Section 80C of the Income Tax Act, 1961. Additionally, the death benefit received by the nominee is tax-exempt under Section 10(10D)..
5.Peace of mind
Retirement can be a worrisome time as you no longer have a monthly salary, yet expenses, especially healthcare costs, may increase as you age. Having a pension plan can provide you with peace of mind, knowing that you will have financial support in your old age.
Pension plans can cover a variety of expenses during retirement and reduce financial stress. This peace of mind can significantly improve your mental health.
To sum it up
Pension plans are essential for ensuring retirement financial security. They help you create a regular stream of income for your golden years and enable you to live the retirement you have always dreamed of. Pension plans also provide support for financial emergencies and enable you to leave a legacy for your loved ones. Investing in a pension plan is highly recommended to ensure a financially secure retirement.
Disclaimer: No Business Standard Journalist was involved in creation of this content