A Complete Guide to Pension Plans in India

Pension/Retirement Plans Guide - BimaBandhu

In the working years of life, we all dream of living a peaceful life after retirement. For many of us, it is about getting ahead of our financial worries. While for others, retirement means enjoying the golden years of life with loved ones in peace. But there is one thing that we fail to think critically about – retirement planning. It is where pension plans play an essential role. They can help you plan for the retired years of your life the right way. 

The primary objective of investing money in pension plans is to receive sufficient monthly income post retirement. Consider the increasing rate of inflation in India, putting money into these plans has become a fundamental way to live a worry-free life. Even having adequate funds in your bank account does not suffice as they may get drained during unforeseen necessities in life. A pension plan will be your financial ally when your salary streams will cease to exist.  

Let’s dig deeper into various aspects related to pension plans. 

What is a Pension Plan? 

Also known as a retirement plan, a pension plan is a kind of investment option using which you can plan your retired life. It can help you accumulate a significant corpus over the long term to ensure a secure financial future after you retire from work life.  

A pension plan is known for providing a steady flow of income that you can utilize during the retirement period. Even if you have substantial savings, investing in a suitable retirement plan still makes sense. If you want to have a financially-sound future post retirement, you should start investing in a pension plan from the early years of your life and continue to invest a specific amount until you retire.  

Another reason you should select a pension plan for life is to deal with financial emergencies that may occur post retirement. With the best pension scheme, you will have a secure cash flow to meet the daily needs in your retired life without external dependence.  

What are the Different Types of Pension Plans? 

A wide range of pension plans is available in the market to cater to the different needs of individuals. Primarily, these plans are classified based on their structure and benefits. The following table summarizes the most common types of pension plans: 

Type of Retirement Plans  About the Plan 
Deferred Annuity 
  • Allows accumulation of corpus through single or regular premium payment over the policy tenure 
  • Provides a pension to the insured after the tenure ends 
  • Amount invested cannot be withdrawn for any emergency 
  • 1/3rd of the corpus is tax-free, while 2/3rd is taxable on withdrawal 
  • Suitable for all types of investors 
Annuity Certain 
  • Provides annuity for a specific number of years as chosen by the annuitant 
  • The beneficiary will receive the annuity in case the insured before complete all payments 
Immediate Annuity 
  • Provides pension immediately after paying a lumpsum amount 
  • The insured can choose from the list of annuity options 
  • Premiums paid are tax-deductible 
  • The nominee receives the money in case the insured dies during the policy tenure 
Guaranteed Period Annuity 
  • Provides annuity for a specific period, like 5 years, 10 years, or 20 years 
  • Annuity is provided whether the insured survives the tenure or not 
With Cover/Without Cover Pension Plans 
  • With cover pension plans also provides life insurance (a lumpsum amount to the nominee in case of the insured’s demise) 
  • Without cover pension schemes do not have a life cover component (corpus payable to the beneficiary after the insured’s death) 

** Deferred pension plans have the option of life insurance, while immediate annuity plans do not have it. 

Life Annuity 
  • Provides annuity until the death of the annuitant 
  • ‘With spouse’ option provides pension to the spouse in case of policyholder’s death 
National Pension Scheme (NPS) 
  • Government-backed pension scheme for retirement planning 
  • Money invested in NPS is put in debt and equity funds to generate returns 
  • The maturity benefits are taxable 
Whole Life ULIPs 
  • Allows investment for the whole life of the insured while he/she can make partial withdrawals on retirement 
Pension Funds 
  • Provides better returns during the maturity period 
  • Regulated by PFRDA 
Defined Contribution 
  • Contributions are defined but the retirement income is not guaranteed 
  • The retirement sum depends on the all-out contributions and returns earned 
Defined Benefit 
  • Ensures that you pay a defined amount from the retirement income for life 

Comparison Between Different Types of Pension Plans 

You can get a better understanding about various types of pension schemes in India by going through the table given below: 

Features  NPS  Public Provident Fund (PPF)  Regular Retirement Product  Whole Life ULIP 
Tax-free income after retirement  No  No   No  Yes 
Fund withdrawal facility  Only up to 25% of fund value after 10 years  Up to 50% of fund value   Up to 33% of the fund value after retirement  100% of fund value any time after five years 
Facility to increase/decrease income  No   No  No   Yes 
Multiple investment strategies to choose from  Yes  No   No   Yes 
Tax benefits under   Section 80 CCD (1B) and Section 80   Section 80   Section 80  Section 80 

 

 Also Read: What is ULIP? 

What are the Features of Retirement Pension Plans? 

Making an informed decision about investing money in pension plans calls for adequate knowledge of their unique features and benefits. If you want to invest in retirement plans, you must know about these features: 

Pension Plan Features 

Definition 

Annuity 
  • The insurer pays the annuity amount as per the chosen type of annuity to the insured. 
  • It is important to consider the annuity offered by the retirement scheme and premium payable before investing in it. 
Vesting Age 
  • It is the age when you will start receiving annuity under your pension plan. 
  • In most cases, it is flexible up to 70 years of age. 
Sum Assured 
  • It is generally offered as a death benefit to the nominee under with cover pension plans. 
  • You should choose the sum assured carefully while choosing any pension plan. 
Payment Period 
  • It refers to the duration when you will receive annuity payments under your pension scheme.  
Surrender Value 
  • It is the amount you will receive on surrendering the plan before maturity provided you have paid the premiums timely. 
  • You may lose the benefits of a pension plan on surrendering it prematurely. 
Accumulation Period 
  • It is also known as the investment period of a pension plan during which you will continue to invest money. 

 What is the Minimum Guarantee of Pension Plans? 

Minimum guarantee related to the pension schemes refers to the assured benefit that the insurer must provide to the investor, as defined by IRDAI. As per the rules, the minimum guarantee should not be less than one percent of the total premium paid over the years. You should also know that: 

  • Minimum guarantee is applicable on almost every type of variable insurance plan. 
  • It also defines the guaranteed amount that you will receive when your pension plan ends. 
  • The returns vary from one pension plan to another.  

What to Consider While Buying a Pension Scheme? 

Given below is a table that enlists the primary factors you must consider while investing in a pension plan: 

Factors  Importance 
Inflation  Consider the changing inflation rate to determine the corpus that will be adequate to live a financially secure retired life. 
Expected Monthly Expenses  Invest a specific sum in a pension plan so that the returns you will receive during retirement are sufficient for your financial needs. 
Average Life Expectancy  This will help you choose the best pension plan to live a worry-free life post retirement. 
Current Financial Liabilities and Assets  You should ensure that these liabilities do not take away a big portion of your annuity income. 
Medical Expenses  Consider them to ensure that you will have adequate funds to deal with medical emergencies that may arise in old age. 
Financial Needs  Assess the needs to realize how much money you will need for yourself and the family after retirement. 
Availability of a Wide Range of Pension Plans  Dig deeper into the benefits of various pension plans to check which one suits you the most. 

 What is Retirement Planning? 

Retirement planning basically refers to the process followed to plan for your retirement age in a way that you will not face financial problems. For many people in India, financial dependence during retirement is a significant cause of stress, which is why it is advisable to plan for your retired life way before the age you retire. In fact, worry-free retirement is the result of careful planning and investing money in the right instruments during the working years of your life. 

With a systematic retirement plan in place, you can achieve both short-term and long-term financial goals. The planning side involves picking up different sources of income, assessing your financial objectives, analyzing future expenses, and managing the investments made in different instruments. 

You should also know the following aspects related to retirement planning: 

  • It involves the distribution of money into different financial instruments to get a significant retirement income. 
  • You can accumulate funds and save taxes simultaneously with the help of various retirement plans. 
  • While planning for retirement, you must consider current and future liabilities before you select any pension plan. 
  • The earlier you start planning for your retirement, the bigger corpus you can build for your retired life. 

What are the Advantages of Investing in Retirement Plans? 

Finding the best pension plan is all about understanding the advantages and benefits you will get with any specific plan. While each pension scheme in India has its distinct retirement perks, there are some common advantages you should know, as given below: 

  • Money savings for the longer term in life in the form of annuity for your post-retirement years 
  • Guaranteed income to manage the day-to-day expenses in the retired life 
  • Insurance benefits to benefit your spouse in case of your untimely demise 
  • Tax benefits under different Sections of the Income Tax Act. 
  • Lumpsum payment for major expenses in life, like child’s wedding or buying a home 
  • Add-on riders to enhance the benefits of your retirement plans 

** For detailed information about the benefits of any insurance plan, please read the plan brochure carefully. 

 Why Should You Start Retirement Planning Today? 

  • The earlier you start planning for your retired life, the more wealth you can accumulate for that phase of life. 
  • Timely planning also helps in taking care of the financial needs of your family after retirement. 
  • The corpus accumulated for retirement can be used to deal with any emergency – health-wise or financial. 
  • With efficient retirement planning, you can maintain a good lifestyle and fulfil your dreams. 

Best Time to Invest in a Pension Plan 

In simple words, the earlier, the better. In general, it is advisable to start investing money in a pension plan from the time you begin your career, i.e., in your 20s. You can start with a small amount initially and then gradually increase your contributions. 

What is the Importance of a Retirement Plan in Life? 

  • You will not have to work always to fulfil the financial needs of your family. 
  • You can plan for a regular source of income during the retirement years with an appropriate pension plan. 
  • You can save for medical emergencies and avoid financial crisis. 
  • You can live your unfulfilled desires and realize them all. 
  • You will enjoy financial independence. 
  • You can support your family financially with the wealth you have accumulated under the plan. 

Important Tips for Retirement Planning 

  • Start investing for your retirement early (today if possible). 
  • Invest in plans that offer life insurance cover. 
  • Diversify your investments into various plans.  
  • Plan for your retirement wants. 

How to Check Your Eligibility for Various Retirement Plans in India? 

You can check the eligibility based on the following parameters: 

  • Minimum entry age, which is commonly 18 years for most pension plans  
  • Minimum premium you can afford to invest in a pension plan 
  • Vesting age when you will start getting the pension (ask the insurer for more information) 
  • Aegon Life Guaranteed Income Advantage Plan 
  • Aditya Birla Sunlife Empower Pension Plan 
  • Aviva Next Innings Pension Plan 
  • Canara HSBC Invest 4G Whole Life 
  • Bajaj Life-Long Goal Pension Plan 
  • Pramerica Life Golden Age Plus 
  • Exide Life Golden Years Retirement Plan 
  • Edelweiss Tokio Life-Wealth Ultima 
  • HDFC Life Click 2 Retire 
  • HDFC Life Pension Super Plus 
  • HDFC Life Personal Pension Plus 
  • ICICI Pru Easy Retire Pension Scheme 
  • India First Annuity Plan 
  • LIC New Jeevan Akshay Pension Scheme 
  • Max Life Forever Young Pension Plan 
  • Reliance Immediate Annuity Plan 
  • TATA AIA Life Easy Retire 

Disclaimer: BimaBandhu does not recommend or endorse any particular life insurance product or company. Hence, reader’s discretion is advised. 

Why Read BimaBandhu for Retirement Planning? 

Retirement planning is a significant decision in life, for which you must gain unbiased information before selecting any pension plan. BimaBandhu aims at emphasizing the need for gaining adequate knowledge about different facets of insurance-buying before you make any final decision. 

That’s why we say – ‘Insurance hai Zaruri, Par Sahi Chuno’. 

You May Like to Read: Why Read BimaBandhu Before Buying Insurance? 

Pension Plan FAQs 

Is Provident Fund different from a pension plan? 

Provident Fund or PF is a government-backed scheme that also helps in retirement planning. However, it is different from a pension plan offered by different insurance companies in India. 

What is PM Pension Scheme? 

Also known as Pradhan Mantri Atal Pension Yojana, PM pension scheme is a unique retirement planning option to bring rural citizens under a pension plan.  

Why do I need to invest in a pension plan? 

With such investments, you can get assured regular income post retirement to enjoy retired life without financial worries. 

Can I calculate the retirement corpus I can build? 

You can use an online retirement calculator for such needs.  

How is a pension plan different from a term plan? 

The objectives of buying these types of insurance plans are different. With pension plans, you plan for your retirement income. However, with a term plan, you build a financial cushion for your family in case of your untimely demise.  

Which type of annuity plan should I choose? 

Knowing about the different types of annuity – immediate, deferred, and others, will help you move a step closer to determining which plan suits your financial profile the most. 

 

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