There is no denying the need and importance of investing in a pension plan if you are a private sector employee, a businessman or self-employed person in India. While public sector workers are fortunate to have a state-sponsored pension system, it’s not so for a large chunk of the workforce working in the private sector.
Moreover, a government-run social security system doesn’t exist in India; hence citizens have to rely on various types of pension plans to enjoy retirement benefits. Also, the prevalence of nuclear families, economic uncertainty, and rising living and healthcare costs today, demand skilled planning, savings and investments in various pension and annuity plans.
What are pension plans?
A pension plan, also called an annuity plan or retirement plan, allows you to receive regular monthly income after retirement. To enjoy retirement benefits with a pension plan, you can invest as a lump sum amount in a single time or systematically invest in monthly, half-yearly or annual premiums over a period of time. A pension plan ensures that you don’t have to compromise on your lifestyle and life goals even after retirement
Types of Pension Plans in India – Features & Benefits
Today, insurance companies have come up with many unique and well-designed pension plans that promise consistent financial support and ensure a worry-free retirement life. Here are the two major types of pension plans in India along with its features and benefits.
1. Immediate Annuity Plans
In an immediate annuity plan, the insurance company agrees to pay the pension immediately (i.e. starting next month/quarter/half-yearly/yearly as opted for) on investing a lump sum amount.
Features & Benefits
An immediate annuity plan is an ideal investment if your retirement date is approaching and you need to replace your existing income through another source. By paying a lump sum amount, you can immediately secure a regular income for your entire retirement life.
You can also opt to receive the annuity or pension as monthly/quarterly/half-yearly/yearly from the commencement of the plan. Some insurers allow you to choose from as many as 6 annuity options, such as:
1. Life annuity
2. Life annuity with return of purchase price
3. Annuity plan for a specific period
4. Joint Life Last Survivor with 50% of annuity to spouse
5. Joint Life Last Survivor with Return of Purchase Price on death of Last Survivor
6. Joint Life Last Survivor with 100% of annuity to spouse
2. Deferred Annuity Plans
In this type of annuity plan, you can accumulate the retirement fund for the long-term by paying premiums systematically on a monthly, quarterly, half-yearly or yearly basis.
Features & Benefits
A deferred annuity plan can be divided into the accumulation and income phase. During the accumulation phase that lasts from commencement of the plan until you choose to receive the annuity, you will be investing in the plan and growing your retirement savings. Then, during the income phase (post retirement a.k.a. Vesting Age), you have an option to withdraw 1/3 of the retirement fund and invest the remaining on an immediate annuity plan to receive a regular monthly pension or you can invest the entire amount into an immediate annuity plan.
Tax Benefits on Pension Plans
Contributions made on pension plans are eligible for deductions under Section 80CCC of the Income Tax Act 1961, up to an extent of Rs. 1.5 lakh per annum.
Tax Benefits on Immediate Annuity Plans
In an immediate annuity plan interest earned is taxed as ordinary income but the principal is exempt from tax. But once you have received the principal amount in full, the payments are fully taxable. However, since you will receive the amount post retirement, the income tax rate will be lower.
Before you buy a pension plan ensure that you have carried proper due diligence and chosen the right pension to meet your retirement goals. Make sure that you have a clear estimate of your future life goals and retirement income requirement while taking your current income, inflation and risk profile into account.