August 23rd, 2022 | Updated on July 7th, 2023
The easiest way to enhance your retirement plan is by making early investments in a pension plan. You and your entire family can benefit during your retirement with the help of a good pension policy. But what are pension plans? And how can you select the right ones for yourself? Let us find out.
What Are Pension Plans?
A pension plan, often known as an annuity or retirement plan, provides you with regular monthly income once you retire. To enjoy retirement benefits through a pension plan, you can invest a lump sum amount at once or progressively over time in monthly, quarterly, half-yearly, or annual payments. A pension plan ensures you do not have to give up your lifestyle or life goals even after you retire.
Understanding Different Types Of Pension Plans
The pension plan options available in India can be classified into the following eight categories:
- Deferred Annuity Plan: This is one of the most common types of pension plan available in India. A deferred annuity plan accumulates a considerable retirement corpus through a single premium payment or periodic payments over the policy term. After the accumulating phase, you begin receiving regular annuities.
- Immediate Annuity Plan: The policyholder receives the pension immediately under this program. The annuities begin immediately once a lump sum payment is made. If the policyholder dies, the money is payable to their nominee(s).
- Annuity Certain: The annuity is paid to the policyholder for a certain number of years in an Annuity Certain Plan. It is up to the policyholder to select the period, and the annuity is given to the nominee(s) if they die before receiving the full payment.
- Insurance Plans With or Without Life Cover: Pension plans, which include life insurance, are the kind of plans that, in the event of the policyholder’s untimely death, pay the sum assured to the nominee on behalf of the policyholder. Pension plans which do not provide any life cover, on the other hand, do not provide a guaranteed lump sum payout to the nominee(s) in the event of the policyholder’s death. However, all premiums are returned to the nominee.
- Guaranteed Period Annuity: As the name implies, a guaranteed period annuity is delivered to the policyholder for a set period, such as 5 years, 10 years, 15 years, or 20 years. The policyholder’s survival throughout that period is not necessary.
- Life Annuity: The pension amount is provided to the policyholder until death in a life annuity plan. If you select the ‘with spouse’ option, the insurer will pay the pension amount to the policyholder’s spouse if they die.
- National Pension Scheme (NPS): NPS is a retirement plan established by the Central Government in January 2004. Except for the armed forces, employees from the public, private, and even unorganized sectors can invest in this scheme. People can invest in a pension account regularly while working under this program. Following retirement, the policyholder may withdraw a percentage of the accumulated sum. The remaining amount will be paid as a monthly pension once you retire.
- Pension Funds: Pension funds are pension schemes that pay for employees’ retirement obligations and are in place for an extended period. Their most attractive feature is that they provide significantly higher profits upon maturity.
- Whole Life Unit-Linked Insurance Plans: As the name suggests, the money invested in these plans remains invested for the entire life of the policyholder, and during retirement, they can take partial withdrawals and get tax-free income. Additional withdrawals are permitted if needed.
How To Select The Right Pension Plan For Yourself?
Some important considerations to make when selecting a retirement plan are:
- Retirement age: In India, the average retirement age is between 55 and 60 years. However, retiring early is becoming more popular, meaning a regular post-retirement income is required for an extended period. Furthermore, if life expectancy rises, you will need a sizeable corpus to ensure that you maintain the same standard of living for the rest of your life. As a result, regardless of your retirement age, creating a retirement corpus is critical. You can use a retirement calculator to see how much corpus you need to accumulate to retire comfortably and worry-free.
- ROI during earning years: The earlier you begin, the higher your retirement savings will be, thanks to the power of compounding. When you are young, you have the potential to take higher risks. Your retirement corpus and post-retirement income should be sufficient to cover day-to-day expenses and any health contingencies and maintain your current style of living.
- Expenses after retirement: As you and your spouse get older, healthcare costs are expected to rise. Furthermore, inflation will cause an increase in the cost of living. Your savings may be your primary source of income after retirement, so investing with discipline is strongly suggested to ensure you can meet expenses, account for inflation, and enjoy a pleasant retired life.
Can You Add Riders To Your Plan?
Riders are the add-on benefits that can be included in certain types of pension plans to enhance the coverage and scope of the plan. Some standard riders offered are critical illness rider, waiver of premium rider, accidental death benefit, etc. These Riders vary from one insurance provider to the other, and you will have to check if your plan has provisions to include any riders or not. But if it does, adding these riders at a little extra cost is beneficial so that you end up with a more comprehensive retirement plan.
To conclude, we can agree that a well-chosen pension plan is integral to retirement planning and is a must if you want a financially secure retirement. However, there are many options available, and you should research and understand these plans and compare them against your needs to choose the right one for yourself.