Reasons Why You Should Get A Pension Plan

Did you know? A study by Max Life Insurance revealed that around 57% of urban Indians feel that their savings for retirement will be exhausted within the first 10 years of their retirement¹. Such figures can be wake-up calls regarding the uncertainty of life, making it crucial to plan a financial future, especially for your retirement days. 

This is exactly what a pension plan can help you with. It will be your safety net when you require financial support in your golden days. However, if you do not know much about pension plans, let's look into what a pension plan is, its types, and why you should get a pension plan for your retirement.

What Is A Pension Plan?

A pension plan is a retirement-focused financial planning instrument that you regularly invest in during your working years. During retirement, it will provide you with a steady income and help you maintain your life even after you stop earning. Moreover, continuous investment with a compounding effect in a pension plan can provide you with the much needed savings into your retirement years, so that you don’t have to compromise on your lifestyle.

Types Of Pension Plans

There are numerous types of pension plans; each one devised to help you plan for certain specific needs in your life post-retirement. Some of them are:

1. Deferred Annuity

A deferred annuity is a type of life insurance plan that provides you with a fixed income in the future on the date of your choice. It offers flexible premium amounts and schedules, making it the most suitable plan for salaried individuals. Additionally, your premiums in this plan are eligible for tax exemption under section 80C.

2. Immediate Annuity

It is one of the basic annuity plans where individuals can invest a fixed lump-sum amount to receive a fixed post-retirement income. This financial investment is further converted into a guaranteed flow of income in a minimum of 5 years or a lifetime. It allows you to start withdrawing after one year of investing in the plan.

3. Pension Plans With Life Cover

Life cover pension plans basically cover two components: the investment component and the insurance component. It combines investment with life insurance. To ensure this, a part of the premium you pay is allocated in the financial market, such as the equity and debt market, and the rest is covered by your life insurance. The primary benefit of this plan is to provide you with a steady monthly income post-retirement.

4. Guaranteed Period Annuity

A guaranteed period annuity policy provides you with a predetermined payout for a specific duration. This duration can be anything, maybe 10 or 20 years. The best part is that these payouts are guaranteed even in the case of the policyholder’s passing away.

5. Annuity Certain

An annuity is considered one of the best retirement plans for a guaranteed pension. Under this type of plan, you can pay a single or regular premium. In return, you receive a fixed, regular payout from the insurer regardless of whether the policyholder is alive or not. 

6. Life Annuity

When you opt for a life annuity plan, you receive a pension amount until the end of your life. Another noteworthy point is that if you include your spouse in the plan, then he or she will receive the annuity continuously even after your demise. This plan can help you in securing the financial future of your spouse, especially if they are dependent on you.

7. Pension Funds

A pension fund is a financial instrument designed to help individuals save for their retirement. By investing a specific amount regularly in pension funds, you can build a significant corpus over time. These accumulated funds can be further invested, and you can even manage their pension benefits through different schemes. These funds are handled by professional fund managers to grow your retirement savings.

8. National Pension Scheme (NPS)

NPS is a government-backed scheme available for Indian citizens, including NRIs. Under this scheme, you invest during your working years to accumulate funds for your retirement planning. These funds are managed by professional fund managers, providing you with market-linked returns and tax benefits. 

9. Pension Plans Under Mutual Funds

Pension plans with mutual funds schemes provide both liquidity and tax exemption. It allows you to create wealth for your retirement planning by investing in mutual funds. However, it is essential to keep in mind that there are different lock-ins depending on the scheme you decide to invest in.

10. Pension Plans Under Post Office Schemes

Post Office Pension Plans are government-backed schemes for small savings. It provides you with a reliable income stream after your retirement. These schemes are a safe and reliable option for conservative investors. Investing regularly in it can help you accumulate a substantial amount of tax-free retirement corpus with time.

Reasons Why You Should Get A Pension Plan

A pension plan is necessary for securing your financial future post your retirement. A few reasons why you should get a pension plan are:

1. Guaranteed Pension Income

Pension plans provide you with a guaranteed income flow after retirement. For example, in immediate annuities, you can start receiving payouts as soon as you retire, providing you peace from financial worries.

2. Tax-Efficiency

Pension plans offer you tax benefits with a deductible limit of INR 1,50,000 under section 80C of the Indian Income Tax Act. Additionally, for certain plans, the partial withdrawal or lump sum upon maturity can also be partially or fully tax-exempted.

3. Inculcates A Savings Habit

Pension plans are designed to encourage a regular saving habit by paying premiums periodically. So, if you start early, during your 20s or 30s, you will have a substantial amount of retirement corpus by the time you attain your ideal retirement age.

4. Long Term Gain From The Magic Of CompoundingCompounding is when your earned interest is reinvested, and it helps you in generating additional returns over time. With the power of compounding, you earn an interest on both your principal and the previously earned interest. For example, if you start saving INR 5,000 per month when you are 25,  you will have approx INR 78 lakh more in your funds by the age you are 60 as compared to starting saving in your 40s.

5. Offers A Flexible And Scalable Investment Plan Along With Insurance

Many pension plans allow you to choose an investment strategy with your savings depending on your risk appetite. Some plans even offer you an insurance plan as an additional benefit to ensure financial security for your retirement years.

6. Safeguards The Interests Of Your Loved Ones

Pension plans protect your loved ones financially, even when you are gone. You can do so by nominating a family member or dependent to receive retirement corpus in the event of your death. Some popular pension plans in India are listed below:

• ABSLI Wealth Smart Plus Plan
• Bajaj Allianz LongLife Goal Plan
• Canara HSBC iSelect GFP- LTI with ROP
• HDFC Click2Wealth Plan
• ICICI Pru Guaranteed Pension Plan
• LIC New Jeevan Shanti Plan

Conclusion

Investing in a pension plan is one of the most practical and secure options for your retirement-focused financial planning. It not only offers you guaranteed pension and tax benefits but also builds a saving habit and provides financial protection.

If you are looking for a platform where you can start saving for your retirement, sign up with Grip today. It is an intuitive and beginner-friendly investment platform that allows you to invest in a wide range of investment avenues, including corporate bonds and other debt instruments. 

Frequently Asked Questions On Pension Plans

1. What is the benefit of a pension scheme?

The benefits of pension schemes include financial security post retirements, tax benefits, compound savings, scalable investment options, and encouraging you to save regularly for your retirement.

2. Is a pension scheme a good or bad investment?

Deciding whether a pension scheme is a good or a bad investment depends on your individual financial goals and needs. For retirement planning, experts suggest including pension plans in your investment portfolio to diversify your investment and balancing risk and returns.

3. What is the disadvantage of a pension?

No investment avenue is risk-free, even a pension. Some disadvantages of pension plans can include a lack of liquidity, limited returns, limited control, limited growth, annuity limitations, and taxes on partial withdrawals.

References:

1. Max Life Insurance, Accessed from: https://www.maxlifeinsurance.com/iris-india-retirement-study-index

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