With ever-increasing costs, you must invest your hard-earned money in schemes and plans that will beat inflation and secure your life post-retirement. The early you start planning for your retirement, the smooth your financial journey will be. Today, pension plans have become fundamental to invest in even if you have extensive investment funds with you. There are different types of pension plans available in India. We should select the right pension fund that suits our requirements.
What are Pension Plans?
Pension plans, also known as retirement plans, come with dual benefits - they offer investment and also insurance coverage. Pension plans help you turn a part of your savings into a long-term regular income. When you invest in pension plans, you can receive a steady flow of income for a long time.
Your savings may get exhausted very fast in case of emergencies. Therefore, you must choose the best pension plans to ensure you have a cash flow under all circumstances to meet your daily needs post-retirement.
Also Read - What is Pension?
Who Should Opt for Pension Plans?
Every individual should buy a pension scheme and plan to have a financially secured post-retirement life. Even if you are in your early 20s, you can opt for a pension plan.
Pension plans covered under Section 80C of the Income Tax Act, 1961 also make you eligible for tax deductions up to Rs 1.5 lakh.
Out of the several types of pension funds in India, you should choose a plan that is in sync with your retirement plans and needs. For example, if you want to retire at the age of 50, you have to have enough corpuses to support your retired life. Thus, in this situation, types of pension funds that are growth-oriented may be a good choice.
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Types of Pension Plans in India
Your pension needs will differ if you are salaried, running your own business, or involved in a profession. “One-size-fits-all” concept fails when it comes to financial planning. You can choose a suitable pension plan out of the different types of funds to meet your needs and tailor them to achieve all your goals.
Deferred Annuity
You can accumulate a corpus for your retirement through a single premium payment or regular premium payment over a policy term. After the policy tenure is over, you will start receiving pension. One-third corpus is tax-free on withdrawal, while the remaining two-thirds are taxable.
The amount is locked, and you cannot withdraw it for any emergency. This pension scheme is suitable for salaried employees since there is an option for a regular premium.
Also Read - Deferred Pension
Immediate Annuity
Under this plan, you start receiving a pension immediately. You pay a lump-sum amount, and you start getting the annuity based on the amount you have invested. You can choose from the range of annuity options under this plan.
The premium paid is exempted from taxation as per Income Tax Act, 1961. In case of the demise of the policyholder, the nominee continues to receive the pension during the tenure of the policy.
Pension Plans with Life Cover
The majority of the pension plans offer life insurance cover with annuity option. In case of the demise of the policyholder, beneficiary will receive the benefits. The primary purpose of the plan is to offer a sustainable pension to the retiree.
And the life cover ensures financial safety for the partner in case of the early demise of the policyholder. A nominal part of your investments in these types of pension funds goes towards the risk cover.
Guaranteed Period Annuity
Under this type of pension plan in India, you receive an annuity for a certain period which is in multiple of five - 5 years, 10 years, 15 years, or 20 years, depending on the flexibility of the plan that you have chosen. Even if the life assured passes away, the beneficiary will continue to receive the annuity that will help them to meet their financial goals in the absence of the policyholder.
Annuity Certain
With this type of pension plan, you receive the annuity for a specific number of years (for example, between age 60 and 70). In case the policyholder passes away before the end date of the policy, the nominee will continue to receive the annuity till the tenure of the policy ends. Such pension plans help you to meet your retirement goals, which will eventually lead you to live a worry-free post-retirement life.
Life Annuity
If you choose a life annuity plan, you will continue to receive the pension amount until death. If one chooses the option ‘with spouse’, the spouse will continue to receive the annuity even after the demise of their partner. It is one of the ways to secure the financial future of your partner, especially if they do not earn. Creating a financial cushion will help in absorbing the shock if something were to happen to you.
Pension Funds
Pension funds are long-term plans that offer comparatively higher returns upon maturity. These types of pension funds are regulated by Pension Fund Regulatory & Development Authority (PFRDA). At present, only 6 fund houses in India are authorized to offer pension funds. You can choose to invest a lump sum or in smaller amounts – you will get a steady income post retirement with pension funds.
National Pension Scheme (NPS)
This plan is one of the two types of pension plans in India which are also used by the Government of India. The plan gives you an option to invest in equity and debt funds depending on your risk profile. You can withdraw up to 60% of your corpus at retirement, and the remaining 40% is used to purchase the annuity. NPS accounts are generally of two types a) All Citizen Model, and b) Corporate Model.
Employee Provident Fund
This is also one of the types of pension plans that is backed by the Government of India. It is regulated by EPFO. This scheme is available for salaried individuals and HUF investors. In EPF, you are required to contribute a certain percentage of your basic wage. The current rate is 10 to 12%. This is matched by your employer. Once you retire, you can receive the total funds contributed, along with the interest rate.
How to Choose the Best Pension Plan?
With so many types of pension plans available, you can follow the below steps if you want to buy the best pension plan
- Know your financial goals, decide your retirement age, and the money you want to receive post-retirement. You can find the total amount you will need by estimating your monthly expenses (post-retirement). The amount will depend on a lot of factors - whether you live in your own house or rented house, the type of city in which you will be spending your retirement, and so on.
- Based on your current income and the future amount you want to achieve, you should decide the amount you want to invest per month. Initially, you may not be able to invest the amount that is required. You can start with whatever you are comfortable investing and increase the amount as your income increases.
- Research the available plans, check for the benefits post maturity, and shortlist the ones meeting your financial goals.
- Once you read all the terms and conditions and understand the product, decide to invest in a plan that meets your goals.
- Don’t invest in a pension plan because someone has advised you to do so, or your friend is buying a similar plan. Your needs and goals can be different from your friend’s.
Five Things to Consider when Buying a Pension Plan
You should look for the following features while buying any type of pension funds in India to secure your retirement:
Annuity Period and Conditions
An annuity is the most distinctive feature of a pension plan in India. You can choose between an immediate or Deferred Annuity . You may need an immediate annuity if you have just retired and need to invest a lump sum amount to start your pension income.
In the deferred option, the pension starts after a certain number of years, and you can either invest lump sum or make regular payments.
If you are planning to buy a pension plan, zero in your choices based on the annuity offered and the premium charged by the company to receive the annuity. Select the best combination of the two.
Sum Assured
There are many types of pension plans that come with a sum assured. Different companies calculate the sum assured differently, and the amount may vary from company to company and plan to plan. First, check if the plan is offering a sum assured.
If so, find how the amount is calculated. It could be 10 times your annual premium or may equal the fund value of the policy. Check if the sum assured is enough and in line with your financial goals.
Accumulation Period
It is a period in which you pay your premium. Check the accumulation period of the policy and ensure it ends before you plan to retire. If your current age is 30 and you are planning to retire at the age of 50, choose a policy where the accumulation period is 20 years or less.
Payment Period
Different types of pension plans can offer you different payment periods. The time at which the annuity starts and the duration for which the annuity will continue should be as per your goals.
Surrender Value
It is the amount the insurance company will pay you if you surrender the plan before the maturity date (if the premium is paid for the minimum period). When you surrender your pension plan, you lose all the benefits offered by the plan. You should check the terms and conditions related to the surrender condition.
How much should you Invest in a Pension Plan?
Your investment into a pension plan depends on whether you are investing for:
| Investing for Post-Retirement Income | Building Retirement Corpus |
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Choose the Right Pension Fund after Understanding your Investment Needs
Assume your current age is 30, and your expected lifespan is 85 years. Your current monthly salary is Rs 60,000, and you wish to retire at the age of 55. Your current monthly expenses are Rs 30,000, and it will be the same post-retirement after adjusting for inflation.
Further assumptions:
- The inflation and income growth rate is 5%
- Your returns on investment will be 8%
To get Rs 1 lakh p.m. post-retirement, you will need a corpus of Rs 2.2 crores approximately. To achieve this amount at 55, you will need to start investing Rs 15,200 per month from the age of 30. The investment amount should increase with your income for the next 25 years (in this case the growth rate was 5%).
How do Different Pension Plans Affect your Investment Amount?
Different plans will need different amounts, for example:
- The maximum investment in PPF is Rs. 1.5 lakhs a year
- The maximum annual investment in ULIP plans for a tax-free maturity is Rs. 2.5 lakhs
- You can invest any amount in NPS, but the tax-saving will be limited to a maximum of Rs. 2 lakhs
- ULIPs allow you to invest in equity funds, while PPF and Guaranteed Savings Plan offers fixed returns
FAQs Related to Types of Pension Plans
A pension is a type of income that you receive after your retirement. It is a regular income stream that helps you to get through your daily expenses post-retirement. To receive a pension, you are required to invest regularly, a part of your income, into certain funds. These are known as pension or retirement funds.
You contribute to this fund regularly till you retire. Through this corpus, you receive regular payments.
There are many types of pension funds in India, these are divided into 4 broad categories. These 4 types of pension plans are:
Government-Backed Pension Plans
There are certain plans that the government has specifically introduced so that you are able to create a good corpus for your retirement. Plans such as National Pension Scheme (NPS),EPF and PPF come under this category.
Deferred Annuity
These are the type of annuities in which the income to be received is deferred to a later date. Thus, returns are started after some time of the premium payment.
Immediate Annuity
In this type, a lump sum is contributed to a regular income stream at the time of pay-out. Here the payment starts almost immediately unlike a deferred annuity.
Pension Plans with Life Cover
These are options that not only provide you with a regular monthly income after retirement but also life coverage. Thus, if you die during the plan, your family will receive a sum assured.
A pension plan is a kind of insurance cum investment plan. In this, you pay a regular (or lump sum) amount to the company to build a corpus over time. Upon maturity (your retirement), your corpus is paid to you in the form of monthly payments. In case the insured dies, the beneficiary receives the sum assured along with bonuses, if any.
The regular payouts you receive under a pension plan post-retirement are called an annuity. In most cases, the annuity duration is monthly. However, it can be quarterly or half-yearly, or yearly.
A pension plan assures a regular income post-retirement and gives you social security. By investing in the best pension plans, you live your second inning as per your choice and without worrying about the money.
The early you start, the better it is. If you start early, the returns you will get from your policy will be higher because of compounding. The best time to start investing is as soon as you receive your first salary. You can start by investing small amounts and later increase your premium amount as your salary increases.
A pension plan is to secure your time post-retirement, while a term plan is to give financial backup to your family in case of your demise within your working life. Though some pension plans also offer life cover, the amount is not good enough.
Yes, you should still buy a pension plan. The growing inflation will make your PF amount look quite small by the time you retire. It won't be enough to meet your future requirements. With age, the medical expenses will increase, and you will need an investment plan like a pension plan to help you with your post-retirement expenses.
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