Pension plans are one of the least understood investment options. In fact, many individuals don’t seem to be aware of such an option and therefore tend to ignore them when planning for retirement. If you’re someone who is in the same boat, then here’s something that can help you out - answers to 5 of the most frequently asked questions about pension plans to help give you some much needed clarity. But before we get to the main part of this article, let’s quickly look at the concept of a pension plan.
What are pension plans?
Also known as a retirement plan, a pension plan is basically an investment option that may allow you to save your hard-earned money over a specific period of years to build a financially secure post-retirement life.
Pension plans are designed to ensure that you get a steady stream of income regularly upon retirement so that you can live your life the way you want to without have to compromise on your lifestyle
In a pension plan, you’re required to make regular monthly contributions for a certain period of your choice. And upon the expiry of the chosen tenure, you get to receive annuity, which is a fixed sum of money, each month for the rest of your life. This annuity payment that you receive each month essentially may act as a replacement to your income stream and can be used by you to take care of your expenses.
FAQs about Pension Plans
Now that you’re well versed with the concept of pension plans, let’s look at some of the most frequently asked questions about them.
1. Are there different types of pension plans? If so, what are they?
Yes. With pension plans, there are different types that are available. Some of the types are described below
If you desire a regular income after retirement, the NPS is a popular alternative. During your working life, you may contribute to a pension account via NPS. Your money is split between different asset classes through fund managers, depending on your preferences. Once you reach the age of 60, you may take a portion of your investment as a lumpsum payment and use the rest to buy an annuity that will provide you with a monthly income.
• Pension Plans with Life Coverage
A pension plan makes sure that your income stream lasts long beyond retirement. These plans combine incentives from investments and life insurance. Through a lump sum investment or premiums that you pay overtime, pension plans allow you to build up a corpus of funds. If you pass away during the insurance period, the death benefit will go to your named beneficiary.
2. When is the right time to purchase a pension plan?
Many individuals think that they should only start investing in pension plans as they near their retirement age. While there’s nothing wrong with that train of thought, it need not always be so. In fact, you may start investing in a pension plan as soon as you start working.
3. Should I still purchase a pension plan despite being a part of the Employee Pension Scheme (EPS)?
As the name itself signifies, EPS is a pension scheme that’s provided by your employer, where a certain portion of your salary is contributed to the scheme each month. And when you finally retire, the scheme offers monthly annuity payments that you can use to take care of your post-retirement expenses.
However, being a part of the Employee Pension Scheme doesn’t mean that you don’t have to invest in a pension plan. In many cases, the pension payment that you receive from EPS may not be enough to take care of your family, especially if there are multiple dependents. Also, the rate of inflation is also something that you should account for as well.
Therefore, taking these two points into consideration, consider investing in a pension plan even though you’re already a part of the Employee Pension Scheme.
4. Do pension plans also offer a life cover or should I opt for a life insurance policy separately?
There are pension plans that also offer life insurance coverage as well.. That said, often, a pension plan with a life insurance cover doesn’t always provide comprehensive protection. Therefore, it might be a better idea to opt for a term insurance policy alongside a regular pension plan. This way, you would be able to cover all your bases perfectly.
5. Do pension plans offer any tax benefits?
Yes. Pension plans do offer tax benefits. The contributions that you make toward a pension plan can be claimed by you as deduction to the tune of Rs. 1.5 lakhs in a year under section 80CCC of the Income Tax Act, 1961 subject to provisions stated therein. Separately additional deduction can be claimed on contribution towards NPS under Section 80CCD of Income Tax Act. A sum up to a maximum of Rs. 50,000/- can be claimed as a deduction by an individual on self-contribution and for contributions made by employers, a deduction up to 14% of basic salary can be claimed by Govt. employees and 10% by other employees. This can help you reduce your tax burden significantly. However, the annuity payments that you receive from the plan, would be taxable according to your tax slab rate that you fall under.
With this, you must now be aware of the concept of pension plans. Before you go ahead and consider purchasing one for yourself, always remember to do adequate research into whether the plan that you’re about to opt for is suitable for you or not. This way, you can make sure that you choose the suitable pension plan that satisfies your needs and requirements.