When to Buy a Retirement Plan?

It’s never too early or too late to start investing in retirement plans. Of the available types, the common two types1 of pension plans, are –

 

1. Deferred annuity plans

 

Deferred annuity plans are those that delay the payouts till after the chosen tenure. This gives you a period to save up a retirement corpus. Under deferred annuity plans, you choose a policy tenure and pay premiums that are accumulated into a corpus. You may choose an endowment-oriented annuity plan for guaranteed^*benefits.

In the case of premature demise, a death benefit is paid. However, if the plan matures, it is called vesting. At that time, you might use the accumulated corpus, fully or partially, to receive annuity payments.

 

2. Immediate annuity plans

 

Immediate annuity plans are single premium plans that aim to create a stream of guaranteed* payouts. Under these plans, payments usually start immediately after you buy the policy. The annuity income is paid till the annuitant is alive if the single life annuity option is selected. There’s also a joint-life annuity option wherein the annuity is paid till any one of the annuitants is alive.

You can buy a suitable retirement plan based on your needs. But what is the preferable time?

Let’s understand.

 

When to Buy a Retirement Plan?

 

The answer to the question depends on which type of retirement plan are you buying. Let’s understand –

1. Immediate Annuity Plans

Immediate annuity plans are suitable when you are nearing retirement or have already retired. Since the plans start paying annuity income immediately, it would be better suited post-retirement. You can create a stream of regular incomes and also add your spouse under the joint-life option to ensure that they receive annuities even when you are not around.

2. Deferred Annuity Plans

When it comes to buying deferred annuity plans, the sooner you may buy, the better. Here are the reasons why –

○ Insurance Protection

A deferred annuity plan offers life insurance coverage during the policy tenure. This insurance coverage allows financial security against unforeseen eventualities. When you buy the plan early, you can get early coverage too and stay financially protected.

○ Long-Term Tenure = Enhanced Corpus

The size of the corpus that you can accumulate directly depends on the tenure that you choose.

○ Save Affordably for Retirement

The power of compounding allows you to save in small amounts and still accumulate a decent corpus for your goals.

○ Enjoy Tax Benefits

Starting early also helps you take early advantage of the tax benefits on deferred annuity plans. You can claim a deduction on the premium paid for the policy under Section 80CCC up to Rs.1.5 lakhs2, under old tax regime. On maturity, commutation of pension received will be tax free in the hands of policyholder. This commuted pension is allowed as a tax-exempted income under Section 10(10A) of Income Tax Act, 1961³.

Assess your retirement needs and then choose a suitable retirement plan. Buy the plan at the right time so that your retirement gets financially secured.

Reference

1. https://cleartax.in/s/pension-plans

2. https://cleartax.in/s/80c-80-deductions

3. https://taxguru.in/income-tax/exemption-commuted-pension-section-10-10a.html

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