How to Build a Tax-free Pension Income for Retirement?

Written by : Knowledge Center Team

2021-05-28

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Everyone dreams to relax at their retirement and reap the benefits of all the hard work they’ve done. And it is only possible if you are having a regular income source even after your retirement. Pension allows you to live the golden years of your life stress-free and it becomes a necessity if you have a dependant spouse.

However, unless you are investing right, you may end up paying a good amount of income tax on your pension. Here are a few investments you must include in your retirement portfolio to enjoy a tax-free pension income in your golden years.

2 Ways to Build Tax-Free Pension with Invest 4G ULIP

Unit linked insurance plans like Invest 4G, are versatile long-term investment plans. You can use them to build a strong retirement corpus and use the features in the plan to draw a tax-free pension after you retire. Thus, ULIP plans can serve three essential purposes for you:

Life protection
Wealth creation through investment
Regular income stream after retirement

You can use Invest 4G ULIP plan to build and draw your retirement pension, without having to change your investment plan. Here’s how:

1. Building the Retirement Corpus

Invest 4G comes with three cover option i.e., Life, Care and Century Option. The first step is to choose the right plan for your purpose:

Life Option: In this option maximum entry age is 65 years and the maximum maturity age is 80 years. However, with a maximum policy term of just 30 years, you need to start the plan at the age of 50, to continue it till 80. Though you can still use this option to build your corpus, you will likely have to switch the plan near retirement for a long-term pension.
Care Option: For this option, the maximum entry age is 50, the maximum maturity age is 80 and the maximum policy term is 30 years. Thus, for the retirement pension goal, this option is the same as the Life Option. However, it is better suited for your child’s financial goals like higher education etc.
Century Option: This is the whole life plan which you can start at the age of 18-65, which continues to serve you till the age of 100. With a maximum policy term of 99 years, this option is best suited for your tax-free pension goal

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If you are starting at the age of 30, you have ample time to use equity funds to grow your retirement corpus. Using Invest 4G ULIP plan you can build your corpus while managing your portfolio risk automatically:

Use automated portfolio management strategies to manage your portfolio of equity and debt funds
Systematically switch your equity fund corpus to debt funds over a few years to avoid missing market rallies and losses due to downtrends

For instance, before you start drawing your pension you would want to move away from the equity and use only debt for safer growth. ULIPs are the best for this purpose as such switches are free of charge and taxes.

2. Drawing Pension from Invest 4G Corpus

Invest 4G ULIP plan has the feature of a systematic withdrawal plan. You can decide on the amount you want to withdraw and the frequency of withdrawal. For example, you want to withdraw Rs. 1 lakh every month from the plan.

Once you have decided the amount, submit your request. Just keep in mind the following two conditions:

You can withdraw 1% to 12% of the fund value in any given year
Your total fund value in the plan should not fall below the life cover sum assured of the plan

The sum assured is the original promised life cover in the plan. The reason why you need to maintain a fund balance above this number is to avoid the mortality charge on your funds.

Mortality charges in a ULIP plan are applicable for the life cover amount which is the balance of “Life Cover Sum Assured – Fund Value”. Thus, so far as your fund value is beyond the life cover amount the mortality charge will be zero.

Since any withdrawals from a life insurance plan are tax-free under section 10(10D) the partial withdrawals from a ULIP in the manner of pension will also be tax-free.

This is how Canara HSBC Life Insurance helps you with its Invest 4G to live your golden years peacefully without compromising your pride and lifestyle.

How Retirement Savings Attract Taxes?

Some long-term investment options can serve you at retirement along with the tax benefits. These are as follows:

Retirement Plans	Taxability on Withdrawal
Public Provident Fund (PPF) PPF is a long-term investment in a combination of risk-free securities backed by GOI where the lock-in period is 5 years and the minimum holding period is 15 years.	Any partial or lump-sum withdrawal from the PPF account is fully tax-exempt.
National Pension Scheme (NPS) It has two options tier-I and tier-II account: Tier-I is the compulsory account of NPS where your fund has been accumulated till the age of 60. Tier-II account has the same feature as Tier-I, but the investment is taxed and has no lock-in period.	Employer’s contribution up to 10% of salary is exempt from tax Lump-sum receipt up to 60% of the pension is tax-free While at least 40% invested in annuity product will be tax-free but interest earned on annuity will be taxable.
Employee Provident Fund (EPF) It is the compulsory contribution of employee and employer throughout employment that gives a fixed rate of returns.	Employee’s contribution is tax-free Employer’s contribution up to 12% of salary and interest earned below the notified rate on EPF is tax-free Withdrawal made after 5 years of contribution would be tax-free
Unit Linked Insurance Plan (ULIP) ULIP is a combination of life cover with an investment option. You can invest in a mix of equity and debt funds as per your risk appetite	Interest earned on your investment and death benefits both is tax-free.
Guaranteed Savings Plan This is a non-linked endowment plan, with a life cover and guaranteed maturity benefits.	The amount you receive on maturity or death is entirely tax-free.
Guaranteed Income4Life This is an insurance cum savings plan, which guarantees you a regular income for a lifetime.	Regular income from this plan is tax-free under section 10(10D)

Thus, you can see that most of the plans which allow you to build your retirement corpus also provide tax-free maturity. However, when it comes to pension, you need to be more tactful, you can use some of these plans to build a custom pension income after you retire. Retirement is the golden year of your life; hence, saving for retirement at an early age will help you plan for contingencies. Also, you do not have to depend on anyone for your finances if you can secure a regular income stream. Start saving early and secure your retirement.

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