It is an important financial decision to plan for your retirement. With the rising cost of living and lack of social security for senior citizens in India, it has become necessary to incorporate a pension plan in your investment portfolio at an early age.
Since they play a crucial part in your retirement planning, it is necessary to know about them as much as possible to make an informed investment decision.
But what is a pension plan, and how does it help? Retirement plans in India, also known as pension plans, require you to invest religiously throughout your working years so that you receive a regular flow of income after your retirement. They are designed to give you a dual benefit of life insurance cover with a benefit of investment. By investing a specific amount towards a pension plan, you will generate wealth over a period of time.
One of the most popular retirement plans in India is a public provident fund (PPF). When you start investing early, you can build a huge corpus of funds in your golden years to help you live comfortably after your retirement. In addition, a retirement fund can also help you combat inflation with the power of compounding.
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Who should invest in Pension Plans?
All individuals are recommended to invest in a pension plan if they want to secure their financial future post-retirement. U/s 80C of the income tax act, retirement plans are eligible for tax deductions up to Rs. 1.5 lakhs per annum. However, when you choose a pension plan, it must align with your retirement goals to support your life in your old age. Therefore, you must choose your plan smartly.
Features of Pension Plans
In this article, we will look at some of the key features of a pension plan that make them an essential part of your investment portfolio.
– Guaranteed income
A good pension plan in India will give you a stable income after retirement, known as a deferred plan. You can also opt for an immediate plan that lets you enjoy a steady income soon after investing. Choosing the right plan will ensure that you live a financially independent life after your retirement. Many websites come with a retirement calculator to give you a rough idea of how much you need after retirement to reach these goals.
– Tax saving
Some pension plans also provide tax saving benefits as specified u/s 80C. For instance, if you invest in National Pension Scheme, you are eligible for tax deductions specified u/s 80CCD.
– Access to liquidity
Even though most pension plans offer low liquidity, some allow you to withdraw even when you are accumulating your funds. In addition, access to corpus during the investment period keeps you secure during emergencies without the need to borrow from friends/family or rely on loans to meet those requirements.
– Vesting Age
Vesting age is defined as the age when you start receiving your monthly pension. For instance, for most retirement plans in India, the vesting age is 45 or 50 years. However, some companies may also allow the vesting age to be as high as 90 years.
– Accumulation period
You can either pay your premium at once or at periodic intervals. The sum will accumulate over a period of time to build a large corpus by way of investment and returns on those investments. For instance, if you start investing as early as 25 years and continue until you are 60 years old, the accumulation of 35 years will ensure that your corpus funds are significant. Your pension will primarily come from this fund for a chosen period of time.
– Payment duration
Payment duration is not the same as the accumulation period. It is during this period that you receive your pension post-retirement. For instance, if you choose your pension to be paid between the age of 60 to 80 years, then the payment duration, in this case, will be 20 years. While this period is separate from the accumulation duration, some companies will allow you to make partial or complete withdrawals during the latter.
– Surrender value
It is recommended not to surrender your pension plan before the maturity period because you will lose all the plan benefits. However, in case you want to still submit the plan due to some unforeseen circumstances, you are eligible to receive the surrender value of your plan.
Before you buy a pension plan, it is crucial to assess your future goals and needs. The best way to plan for your retirement is to keep your current income in mind and set aside an amount that you want to invest in the plan. Also, don’t forget to research all the plans and read about their benefits before choosing the right scheme.