Pension Products
Pension Products
Retirement plans are financial policies that enable you to plan for the future, even when you no longer have a steady income. There are two types of plans:
Pension Plans:
These investment plans allow you to systematically save money over the years so that you can enjoy a steady income once you retire. With a pension plan, you can maintain your financial independence, even when your income stops post retirement. Most importantly, a pension plan allows you to deal with inflation without compromising on your standard of living.
Annuity Plans:
An annuity plan helps you secure your financial future with regular income payments for the rest of your life. With a pension policy, you have something called an accumulation phase. During this time, you put money into the policy periodically. When you choose to retire, you can purchase an annuity with these accumulated funds. The annuity then provides you with regular payments as per the terms and conditions of the plan you purchased.
Depending on when you’d like to start receiving the annuity benefits, you can select between two types of annuity plans:
- Immediate Annuity: Immediate annuity plans start providing payouts on a monthly basis right after you purchase the plan. These plans benefit individuals who have just retired and have a corpus to purchase the annuity plan.
- Deferred Annuity: A deferred annuity plan, on the other hand, has an accumulation phase first. Individuals can purchase an annuity and put funds into it regularly. The amount gets invested by the insurance company to grow the corpus. You can then select a date to start receiving payouts from the accumulated corpus. Since the payments happen after a period of time, it’s known as a deferred annuity.
How do Pension Plans work for an Individual?
Suppose you are 35 years old and plan to retire at 60 years of age. You estimate is that you will need ₹ 45,000/- per month to maintain your lifestyle post-retirement.
Accordingly, you will need to build a fund within the next 25 years that generates a monthly income of ₹ 45,000/-. This creation of a fund is what a pension plan’s role is: You put in a fixed sum regularly, and your capital grows through investments.
At retirement, you can withdraw a specific percentage of the accumulated funds. The remaining fund generates a fixed, regular income for you during your retirement years.
Types of Pension Plans
- National Pension Schemes (NPS)
- Employee Provident Fund (EPF)
How to choose the right Retirement plan?
- Risk: Your risk appetite is an important factor to consider while choosing a pension plan. If you have a low risk appetite, you can choose low-risk plans that offer a fixed rate of return and are not market-linked. If you have a high risk appetite, you may consider a plan that provides market-linked returns and the potential for high returns.
- Life-stage: When you are young, you have a higher risk appetite. You can look for plans that offer market-linked returns. As you grow older, you may not want your savings to be affected by marked volatility. For this, you may consider plans that offer fixed returns without market risk.
- Tax: It is important to consider the tax benefits and liabilities associated with different retirement plans. Check the tax benefit you can avail of on your premium or contributions and the tax treatment on your returns at the time of withdrawal before choosing a plan.
- Fees: Review the fees and expenses associated with each retirement plan. High fees can significantly impact your long-term returns. Therefore, it is important to understand how these affect your overall gains.
