Table of Contents
Introduction:
With rising life expectancy, it is going to be of paramount importance to make provisions for a prolonged post-retirement period. Unfortunately, many people fail to prioritize retirement over other financial goals, such as a son’s education or a daughter’s marriage. As a result, they are left with no or very little savings post-retirement.
Hence, it’s crucial to understand how Pension Pension Plans work at an early stage in your life so that you can have a comfortable retirement. This article will explore how Personal Pension Plans can help you have the retirement you’ve always dreamed of.
What is a Pension Plan?
A pension plan or retirement plan gives individual regular payouts after he retires. In India, there are various types of pension plans offered by different entities. Regular investing makes it possible to develop a sizable corpus that, on maturity, gives you a steady monthly income to take care of your post-employment years. The regular payouts you get are called an annuity or pension.
Several pension plan options are available in India, which include pension plans with insurance, pension plans without insurance, and retirement schemes provided by the government.
In this article, we will focus specifically on pension plans offered by life insurance companies, more commonly referred to as Personal Pension Plans.
How do Personal Pension Plans work?
Personal Pension Plans are an excellent way to equip you for your retirement. When you plan and save for your retirement at an early stage in your working life, it helps to secure a sizeable fund that will last you throughout your retirement years. Regular contributions to a Personal Pension Plan play a significant role in safeguarding your golden years.
By depositing a set amount into a Personal Pension Plan, an individual can create a pension fund that will provide them with payments during retirement in the form of an Annuity. The exact amount of Annuity payments (Pension) will depend on the payout option you choose.
The purpose of a pension is to provide an income during retirement, so it’s essential to ensure that your pension is adequate to cover your future financial needs. Once you’ve determined how much money you’ll need from your pension, the next step is to learn about the different types of Personal Pension Plans.
Types of Personal Pension Plans:
There are three factors on which Personal Pension Plans can be categorized. These include the desired start time of the pension, the investment allocation of premiums, and the availability of insurance coverage. Let us explore each of these options below.
A. Pension Start Time:
You have the option to commence receiving pension payments in accordance with your retirement age. There are two types of Personal Pension Plans available based on when you choose to initiate receiving pension payments:
a. Deferred Annuity Plan:
A Deferred Annuity Plan allows you to choose when to start your pension. Thus, you get to pick the desired pension start date in alignment with your retirement date.
Example: A Deferred Annuity Plan that you contribute premiums to for 20 years will begin payouts only after those 20 years have passed. This means that you will not receive any annuity payments until the deferment period or vesting age. You can choose to pay a ‘Single Premium’ or make ‘Regular Premium’ payments for the plan.
There are two phases in a Deferred Annuity Plan. Accumulation Phase and Income Phase. At the end of the Accumulation Phase, you get the option to withdraw 1/3rd of the corpus. The remaining 2/3rds of the corpus can be used to buy an Annuity.
b. Immediate Annuity Plan:
Immediate Annuity Plans allow you to start receiving annuity payments right away. In order to do this, you will need to pay a Lump Sum Premium upfront. Once the premium is paid, you will start receiving payments immediately or after a year. You can choose the frequency of your payouts from monthly, quarterly, half-yearly, or yearly.
B. Premium Investment Allocation:
Each individual’s risk tolerance level is different. You can choose the appropriate Personal Pension Plan from the two options mentioned below based on your ability to cope with risk.
a. Traditional Retirement Plans:
These plans are mostly funded by contributions or premiums invested in debt instruments, such as government securities. As a result, these options are suitable for risk-averse investors because of their inherently low risk.
b. Unit Linked Pension Plans (ULPPs)
In ULPPs, depending on your investment goals and risk tolerance, you can choose to allocate your investment into different asset classes like equity, debt, or a mixture of both. With equity investments, you will assume high risk but have the potential to earn high returns. Alternatively, with debt investments, you will assume low risk but have the potential to earn medium returns.
C. Availability of Life Insurance Coverage:
You can choose from the following types of Personal Pension Plans based on whether or not you require life insurance coverage.
a. With Life Insurance Coverage:
Personal Pension plans with life insurance coverage will pay the sum assured to the policyholder’s nominees if the policyholder dies during the accumulation stage.
b. Without Life Insurance Coverage:
On the other hand, Personal Pension Plans without life insurance coverage will only pay the corpus built up to date (contributions made) with interest (as decided by the insurer) to the nominees in case the policyholder dies during the accumulation stage.
Features & Benefits of Personal Pension Plans:
Steady Cashflow post-retirement: Investing in a Personal Pension Plan can provide you with a fixed and steady income after you retire. The amount of pension payouts is proportional to the premiums you pay. These payouts can contribute to covering your post-retirement expenses. You can use a retirement calculator to determine how much money you would need to sustain your lifestyle after retirement.
Liquidity: Retirement plans typically offer low liquidity, but some allow withdrawals even during the accumulation stage. This can provide peace of mind during emergencies, knowing that you won’t have to rely on loans or other financial assistance.
Vesting Age: The age at which you become eligible to receive a monthly pension varies depending on the plan. However, most Personal Pension Plans have a minimum vesting age of 45 or 50 years. The vesting age can be maximum up to the age of 70 years.
Accumulation Period: An investor has the option to pay the premium either through periodic intervals or as a lump sum investment. By doing this, the wealth will gradually accumulate over time to eventually produce a sizable corpus. For example, if an individual starts investing at 30 and continues until they turn 60, the accumulation period would be 30 years. Your pension for the chosen period would be paid from this accumulated corpus.
Payout Term: Investors need to understand the difference between the accumulation period and the payout period. The accumulation period is when you’re putting money into your pension, and the payout period is when you start receiving pension payments after retirement. So, if you start receiving pension payments at age 60 and continue until age 80, that would be a 20-year payout period. Most pension plans separate these two periods, but some allow partial or full withdrawals during the accumulation period.
Surrender value: Surrendering a Personal Pension Plan before maturity is generally not a smart move, as the investor stands to lose out on several benefits, including the assured sum and life insurance cover.
Who should buy Personal Pension Plans?
Personal pension plans are beneficial for individuals who are concerned about their retirement. Especially if you are self-employed or employed by a company that doesn’t offer retirement benefits, a personal pension plan can be a sensible choice for you.
How to Choose the Best Personal Pension Plan?
It’s never too early to start saving for retirement once you start earning. Reviewing various pension plans is the first step to understanding the requirements for life after retirement. Planning ahead also allows your investments more time to grow and yield better results. Recognizing suitable pension schemes and the options available is vital in making an informed decision.
Some things to keep in mind when determining the best retirement plan for you include:
Your current age: Starting sooner rather than later has its advantages, the most notable being compounding. Compounding is when you reinvest your earnings and let them grow. The earlier you start, the more time your money has to grow. Another advantage of starting early is that you’re typically more willing to take risks when you’re young.
Your expected retirement age: The date of your expected retirement age is important as it corresponds with the premium amount you need to pay. The farther the date is, the lower the premium; the closer the date is, the higher the premium.
Your current income and savings: Your current income and savings can serve as a helpful starting point to determine the amount of money you should allocate toward your pension plan. If you already have a solid savings plan in place to cover major financial goals, you can probably get away with setting aside a smaller amount for your pension.
Your Post-Retirement Expenses: Assessing your future expenses is a critical component of a well-rounded retirement plan – this includes your monthly bills and any other significant expenses that need to be covered by your income. It’s crucial to factor in medical treatment costs, as you’ll be more vulnerable to health issues as you age.
Outstanding Debts: If you have any outstanding loans with a repayment period that extends beyond your working life, it’s critical to consider these additional expenses while calculating your pension amount.
Impact of Inflation: The amount of money you invest today should be based on how much it’s expected to be worth in the future. Your investment’s return should not only be enough to support your regular household expenses but also allow you to maintain your desired standard of living once you retire.
Policy Features: When searching for a policy that works well for you, be sure to keep your crucial financial goals in mind and try to find a pension plan with features that serve those goals. In addition, familiarize yourself with the various policies out there so you have a better idea of what’s feasible and what might work best for you.
Resources:
https://cleartax.in/s/pension-plans
https://www.pfrda.org.in/myauth/admin/showimg.cshtml?ID=2170
Frequently Asked Questions:
Which entity regulates Pension Schemes?
Pension Fund Regulatory and Development Authority (PFRDA) regulates Pension Schemes in India. It’s an Authority set up by the Government of India through the PFRDA Act 2013.
What is an Annuity?
An annuity is an insurance product that offers an income stream to the policyholder, usually monthly. However, you can also choose to receive your annuity payments quarterly, half-yearly, or yearly.
What is (National Pension Scheme) NPS?
The National Pension Scheme (NPS) is a social security program endorsed by the government, available to all employees in the public, private, and unorganized sectors. The program encourages people to save regularly for retirement by contributing to an NPS account during their working years. Upon retirement, individuals receive a monthly pension based on the amount of money they have accumulated in their NPS account.
When is the right time to purchase a pension plan?
Many people think that they should only start investing in pension plans when they are about to retire. However, that isn’t a wise approach because if you start planning for your retirement early in your career, it gives adequate time for your savings to grow into a sizable corpus, which can be utilized to purchase the annuity.
Can I surrender my Personal Pension Plan?
Yes, it is possible to surrender a Personal Pension Plan purchased from any life insurance provider in India. However, you might have to pay applicable surrender charges or penalties as per the terms and conditions of the policy.
Therefore, you must carefully review the terms and conditions of your policy. And if needed, you can also contact your insurance provider to thoroughly understand the implications of surrendering your pension plan. Besides, surrendering your policy may have tax implications, so it is sensible to seek professional advice before initiating the process of surrender.
Can I buy more than one Personal Pension plan?
Yes, you can purchase multiple Pension Plans for yourself. There is no constraint on the number of pension plans you can buy.
Do I need a pension plan if I have a PF?
Although you have PF, it may or may not be sufficient to fund your retirement. Inflation can significantly impact your retirement plans as it lowers the buying power of your savings, which is why it’s essential to have a comprehensive retirement plan. A suitable pension plan can cover any deficit and complement your PF accumulation.
How is a pension plan different from a term plan?
A term insurance plan provides financial protection to your dependents in the event of your untimely death. It acts as a safety net to cover unforeseen circumstances. In contrast, a pension plan ensures that you will have a steady flow of income after you retire, thereby replacing your salary or business income.
Do I get any tax benefits on the premium payments made towards pension plans?
Under Section 80CCC of the Income Tax Act of 1961, individuals can claim annual deductions of up to ₹1,50,000/- for contributions made towards pension plans offered by life insurance companies.
Can I claim deductions under sections 80C and 80CCC separately?
No. The deduction under Section 80CCC is part of the overall deduction under Section 80C; hence total deduction of ₹1,50,000/- is available.
Is HUF (Hindu Undivided Family) eligible for exemption under Section 80CCC?
No. HUF is not eligible for exemption under Section 80CCC.
Can NRIs claim deduction under section 80CCC?
Yes.
Should I file an income tax return on my pension income?
If your total annual pension income exceeds ₹2,50,000/-, filing an income tax return is mandatory. However, senior citizens aged 60 or above have to file income tax returns if their annual income is more than ₹3,00,000/-, and super senior citizens aged 80 and above have to file income tax returns if their annual income is more than ₹5,00,000/-
Which category or head should Pension income be declared under for tax purposes?
Pension income is categorized as ‘Income from Salary’ and is taxable. On the other hand, family pension, which is the pension paid to the widow and children of a deceased pensioner, is categorized as ‘Income from other sources’ and is also taxable.
Are the pension payouts tax-free?
No. The pension received is not tax-free. The proceeds from pension plans, including any bonus or interest accrued, are taxable.
Conclusion:
Retirement is a well-deserved time to unwind, pursue neglected hobbies, and spend quality time with grandchildren. However, retirement can be stressful if you have not adequately prepared for it.
We hope this article has given you valuable insights into retirement planning and has equipped you to choose a suitable Personal Pension Plan. If you have any questions, please do not hesitate to Contact Us. We will be more than happy to assist you in any way we can.
Disclaimer:
This article provides general information only and does not constitute financial advice. Financial regulations, product terms, and industry guidelines are revised from time to time. While we have made efforts to ensure the accuracy of the information presented, we do not guarantee its completeness or accuracy. We disclaim any liability for loss or damage arising from actions taken based on the information provided in this article. To make informed financial decisions, please do your own research and consult with a qualified financial professional.
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