When in conversation with friends and family, the mention of one’s workplace is fairly common. If you have been working for a few years now, it is also possible that discussions about retirement planning might also spring up. However, if you have just started working, such a conversation may seem untimely. But the truth about retirement planning is it is never too early or too late to start. Rather, the suitable time to start is now. A retirement plan is always preferred no matter what group you fall in.
Understand Pension Plans
A retirement plan is specifically designed to meet your post retirement needs. You deposit a certain amount for a certain period of time. This amount accumulates, and once you retire, you will receive a regular income, which is called an annuity. Annuities may be customised as per your needs and future plans.
Broadly, an annuity can be received in 2 broad categories: Immediate Annuity and Deferred Annuity. Immediate annuity plans provide their policyholders with monthly or annual annuity immediately after investments have been made by the policyholder. If you want to avail of annuity payments after a specific period of time, you can opt for a deferred annuity. The date at which you choose to start your pension is called the vesting date, and you need to choose the same according to the options provided by the plan.
Most companies offer a wide range of options when it comes to annuity payouts. You can opt for a guaranteed income on a monthly/ quarterly/ half yearly/ annually as long as you or your spouse is alive. Make sure you are well aware of all these aspects before you sign up for a long-term commitment.
Another important aspect of a pension plan that you need to understand is its tax implications. Keep the following points in mind:
- The premiums that you pay towards a deferred annuity plan qualify for deductions under Section 80CCC of the Income Tax Act, 1961.1
- Exemption under Section 10(10A) is also available for the benefit received from a pension plan. The conditions for tax exemption in respect of commuted pension in case of a non-Government employee are as follows –
- If the employee receives gratuity, one-third of the full value of commuted pension is allowed as an exemption
- If the employee does not receive any gratuity, half of the of full value of commuted pension is allowed as an exemption
Pension Plans for Different Age Groups
At different stages of life, you may feel that your priorities, responsibilities, and liabilities are changing, and you may find that your future plans are changing. Therefore, it may become all the more important to ensure that the pension plan you choose caters to your growing or changing financial requirements. And while you may not be able to predict these requirements, you might need to have enough coverage so that all such needs are taken care of.
If you have been contemplating your livelihood after you retire and are wondering how to buy a pension plan that would suit your particular needs, read on.
1. In your 20s
If you have recently started working and have already started thinking about your retirement, this may be one of the preferred decisions you make in life. Consider investments early is an important step towards exemplary financial planning. If you start saving now, in about 40 years, you may be able to build an adequate corpus. Saving may be easier when you have lesser financial commitments to shoulder. Imbibing a habit of saving that too at a young age might help you all through your life.
2. In your 30s
By the time you are 30, finances may seem to be more in your control. You would probably be more mature in handling money matters. With your shoulders heavier with responsibility, you may be able to see the goals for a retired life more clearly, and thus may want to invest in a pension plan more suited to your needs.
3. In your 40s
There are many who feel that planning your retirement becomes easier when you are in your 40s. You are more professionally seasoned, might be at a reputed designation, people who have kids, their kids are grown up etc.. Thus, this may still seem like a suitable time to buy a pension plan. Therefore, if, for some reason, you haven’t been able to invest in a retirement plan, now is the time.
4. In your 50s
Even if you are nearing 50, the situation is still manageable. Remember, it's never really too late. Though, investing in your 50s may require you to be more aggressive toward your savings. You need to analyse your existing and future liabilities, such as education or your child's wedding, buying a house, etc., and then assess the corpus you need. The pension plan you buy might be bought, keeping the current financial requirements in mind. If you are in your late 50s, investing in a suitable immediate retirement plan or a single premium scheme may be preferred.
Delay in Retirement Planning:
While there is no denying that your younger years may be times of care-free triviality, leaving all worries about the future may not be helpful in the long run. Working towards short-term goals like going on a vacation, buying your first car/ bike, and spending on things you like is important, but planning your retirement correctly is crucial. Consequences of deferred planning, such as the following, may make things a little different in the second inning.
- For a long time, you may miss out on saving on taxes
- You may lose out on the possibility of availing benefit of compounding on your investment returns.
- You may lose out on the possibility of early retirement due to lack of funds or income earning opportunities.
It is only preferred to start thinking about your retirement much before you approach it. Reviewing your finances at the suitable time will enable you to enjoy the lifestyle you dream of. If you wish to know how to buy a pension plan, the first suggested step would be to use a pension calculator. While buying a pension plan is not very difficult, it is preferred to turn to a professional in case you find the process overwhelming.