Investments are a great way of creating a nest egg and ensuring a level of financial safety against the uncertainties of the future. A Pension plan, also known as a retirement plan is accumulating a part of your savings and receiving a stipulated amount as pension when you retire. Even though having substantial savings may seem like a great option but the savings can deteriorate fast and even faster in case of emergencies. Pension plans might seem a thing to be considered for the future but with new schemes being introduced each year, it is evident that the sooner you invest, the more beneficial it gets.
Types of Pension Plans
Just like any other investment plan, there are various kinds of pension plans available in the market. Based on their structures and benefits these can be divided into:
1. Deferred Annuity: Under a deferred pension scheme, you accumulate a corpus through multiple premiums or a single premium over policy. Once the stipulated term is over the pension will commence.
2. Immediate Annuity: With an immediate annuity, the pension payment begins instantly. The subscriber deposits a lump sum amount and the pension will start based on this amount.
3. Annuity Certain: Under the annuity certain, the recipient a certain annuity for a certain number of years, the duration can be chosen by the recipient at the beginning of the scheme. If the recipient dies before the stipulated term, the annuity is paid to the beneficiary nominated by the pensioner.
4. With cover and without cover pension plans: The with cover pension plan includes the life cover whereas the without cover pension plan implies that there is no life cover involved.
5. Guaranteed Period Annuity: Under the guaranteed period annuity the recipient is paid the annuity for certain periods such as 5,10,15 years, whether or not the recipient survives the stipulated term period.
6. Life Annuity: As per life annuity scheme, the recipient receives the annuity until death and if the spouse is added to the scheme, the pension will be paid to the spouse of the policyholder in case of death.
7. NPS: The National Pension scheme is a voluntary contribution retirement savings scheme designed by the Government of India for people who want to invest in a pension plan.
Why do you need a pension plan?
A pension plan doesn’t only provide the stipulated amount but is also a sound investment plan, as your money grows manifold due to the compounding interest that makes a great impact on the final savings. A pensions plan when chosen judiciously helps assist in the retirement phase. The Government of India has launched plans focusing on the benefits of pension and encouraging people to invest for more financial security for their future.
National Pension Scheme
Keeping in mind that the life expectancy in India has increased in the past decade, Government of India established the Pension Fund Regulatory and Development Authority (PFRDA) in 2003. The National Pension Scheme (NPS) was launched in 2004 with an objective to promote awareness regarding pension and provide a retirement income to the citizens. Although this scheme was introduced for new government recruits but was later amended to include all citizens.
Under NPS the subscriber is allotted with a unique Permanent Retirement Account Number (PRAN). Currently, the withdrawals from the MPS are exempt from income tax but only if the amount is up to 40 percent of the corpus and upon reaching the age of 60 years. If the subscriber wishes to exit the NPS before the stipulated time (i.e. before reaching the age of 60), only up to 20 percent of the corpus can be withdrawn and the rest converted into an annuity. Under the NPS scheme, the subscriber can make early withdrawals for a maximum of three times and at an interval of not less than a period of five years. The scheme limits early withdrawal amount to 25 percent of the contribution.
According to the budget of 2017, withdrawal of 25 percent of the corpus by the subscriber has been exempt from income tax effective from April 1, 2018.
NPS also has provisions for the citizen to route his/her through their employer or deposit it directly.
Atal Pension Yojana
In the year 2010-11, the government of India launched the Swavalamban Scheme. This scheme failed to gain much popularity mostly because it doesn’t have guaranteed pension options at the age of 60. Atal Pension Yojana (APY) was announced in the budget for 2015-16 with provisions of a fixed pension ranging from Rs 1000 to Rs 5000, provided the subscriber joins between the age of 18 and 40 years. It was stipulated in the scheme that the Government would contribute 50% of the subscriber’s contribution or Rs 1000 (whichever is less) for those who have entered the scheme before 31st December 2015. According to the yojana, the contribution amount varies for the subscriber depending upon their age. For example, is a subscriber joins the Yojana at the age 18, for a monthly pension of Rs 5000/-, he/she would have to contribute Rs 210 monthly whereas for the same plan the contributor would have to pay Rs 1454 monthly at the age of 40. Hence showing that it is beneficial to enter the scheme early and be rest assured about the financial safety at the time of retirement.
The scheme ensures that a monthly pension as stipulated in the respective scheme would be paid to the subscriber and in the event of his/her death the pension corpus would be returned to the nominee.
Under APY the applicant must have a bank account with facility of auto debit for transferring the contribution periodically. The people who subscribe to the policy have the option to increase or decrease the pension amount during the stipulated years although the switching option shall be provided once in year during the month of April.
Pradhan Mantri Vaya Vandana Yojana
The Pradhan Mantri Vaya Vandana Yojana was launched in 2017 and is available until 01st May 2018. This scheme was introduced for senior citizens and can be purchased online as well as offline through LIC. Under this scheme, the pensioner is entitled to the decided pension at the end of each period (monthly/quarterly/ half-yearly/ yearly) as chosen by the pensioner for the policy term of 10 years. The PMVVY provides a return of 8.3% per annum for the term. In case of the pensioner’s death, the accumulated amount under the policy is paid to the nominee and upon the survival of the pensioner at the end of the policy term. The pensioner is entitled to the purchase price and the final pension installment.
This scheme was created keeping in mind the varied needs of the people. Various provisions contribute to a certain flexibility and freedom to choose a suitable structure of the plan.
The pensioner can purchase the scheme at a lump sum purchase amount and he/she can also choose the pension amount or purchase price.
The minimum and maximum Purchase Price under different modes of pension are:
Mode Min Purchase Price Max Purchase Price
Yearly Rs. 1,44,578/- Rs. 7,22,892/-
Half Yearly Rs. 1,47,601/- Rs. 7,38,007/-
Quarterly Rs. 1,49,068/- Rs. 7,45,342/-
Monthly Rs. 1,50,000/- Rs. 7,50,000/-
Tips to choose the right pension plan
As daunting as it may sound, choosing the right retirement plan is very crucial. Keep the following tips in mind while deciding on the pension plan that suits your requirements.
- Needs: It is important that you understand and foresee how much you and your dependents would require after retirement to maintain your standard of living. Understanding this would give you a ballpark on how much you need to invest.
- Research: Diligent research is pivotal. With various instruments of investments available in the market, it is important to read and comprehend the terms and conditions of each plan before making the plunge.
- Analyze: Study each plan to figure out which pension plan suits you and your family’s needs the best. Needs of each individual are unique and require the plan that meets those needs. Never purchase a pension plan solely based on the trend or because someone you know recommended it.
- Look beyond the tax benefits: While this is a common factor encouraging people to opt for a pension plan, it has more benefits than tax saving. Financial security and stability in old age is a commodity that no one can put a price tag on and needs to be considered as a vital and sensitive matter.
Old age and the uncertainties that come along with it are unavoidable. But financial crisis in old age is completely avoidable provided sound investment decisions are taken at the right time. And no matter what’s your age, the right time is now. A pension plan is not just a safety net that provides a certain income after retirement but also enables funds in case of emergencies. This not only ensures a stress-free and hassle-free life once you retire but also a life of dignity during that phase.