The Most Important Pension Plan Facts

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 29, 2021

Introduction : The Most Important Pension Plan Facts

Life insurance firms’ pension plans assist individuals in efficiently planning for their retirement by assisting them in building a retirement corpus. In their golden years, pension plans offer retirees with a steady income.

In India, pension plans are divided into two phases: accumulation and vesting or distribution. You’ll have to pay annual premiums until you reach retirement age during the accumulation phase. The money is invested in securities approved by the insurance regulator, the Insurance Regulatory and Development Authority (IRDA).

The vesting phase begins as soon as you reach retirement age. During the vesting period, the retirement corpus will be delivered to you (or your family) as annuities at regular intervals, such as monthly, quarterly, or yearly.

Types of Pension Plans

Life Annuity
With & Without life Cover Pension Plan
Traditional and Unit-Linked Pension Plans

Life Annuity

You are paid a fixed annuity at regular periods throughout your life under this form of pension plan. The payment is halted after your death. The following are the several types of life annuities:

Lifetime Annuity with a Guaranteed Period: You will be paid a larger annuity for a specific guaranteed term in this life annuity, and then a similar amount will be paid at regular intervals until you die, which will be stopped when you die. If you have someone to look after you, it is appropriate.
Annuity With Purchase Price Return: You will receive a pension from this life annuity at regular intervals until you die. The purchase price of the annuity is also repaid to your beneficiary after your death. Choose this option if you want to leave any money to your dependents.
Annuity Increase at a Fixed Rate: You will receive an increasing quantity of pension at a fixed rate in each interval if you choose this life annuity option.
Annuity on a joint life: You and your spouse can together purchase this life annuity. You’ll get the pension until you die, and your spouse will get it until he or she dies. To put it another way, the pension is paid to the last survivor.

With & Without life Cover Pension Plan

Pension plans with life insurance pay a lump sum to the policyholder’s nominee in the event of the policyholder’s untimely death during the accumulation phase. Before investing in a mis-sold SIPP, it is advisable to seek advice from a SIPP professional.
On the other hand, plans without life insurance do not provide a guaranteed lump sum payment in the event of the policyholder’s death. However, the candidate receives a refund of all premiums paid.

Traditional and Unit-Linked Pension Plans

In a traditional pension plan, the money is largely invested in government securities. A unit-linked pension plan, on the other hand, invests in a mix of bonds, equities, mutual funds, and other assets.

Eligibility Criteria

Individuals must be between the ages of 35 and 75 to be eligible for a pension plan, while the age range varies depending on the insurance provider.

Benefits/Advantages

One of the most important benefits of a pension plan is that it helps you meet your retirement expenses by providing guaranteed income for the rest of your life.
Some pension systems also provide lump-sum cash when you need to cover large expenses like buying a house, paying for your child’s education, or getting married.
Section 80C of the Income Tax Act of 2016 provides income tax incentives for pension plans. You will not be taxed on the annuities you receive.
Pension plans can safeguard you from unforeseen circumstances like death by protecting the family’s income and alleviating financial strain on the surviving spouse and other family members.
Pension Plan helps you live a more independent life by reducing your reliance on children or other relatives.

Riders

The following riders are offered with pension schemes to improve the benefits provided:

Term rider
Accidental death and dismemberment rider
Waiver of premium rider
Critical illness rider

How to Purchase a Pension Plan Online

The following are the five basic procedures you must do when purchasing a pension plan online:

You must first log in to the company’s website in order to purchase the pension plan.
Following that, you must select the required pension plan from the available options by comparing the features of each plan.
Following that, you must select the coverage/sum assured and supply all of the necessary information.
The insurance company will now calculate your premium based on the information you provided.
After that, you must pay the premium online using a debit card, credit card, or net banking facility, and the policy will be issued.

Tips for Purchasing a Pension Plan

Systematic and foresightful planning: Early planning will work in your favour because it will allow you to choose the most cost-effective pension plan options. A systematic investment in a pension plan will allow you to accumulate a sizable corpus by the time you retire.
The Best Pension Option: Choose a pension plan that meets your needs, such as an Annuity payable for Life with Purchase Price Return, a Life Annuity with Guaranteed Period, an Increasing Annuity, or a Joint Life Annuity.
Returns: Choose a pension plan only after you’ve gotten a good notion of the potential rewards. Always remember that if returns are assured, the rate of return is likely to be modest. Choose a strategy with a high rate of return. It’s also crucial to keep track of the plan’s performance after it’s been chosen at regular intervals.
Tax advantages: Insurance premiums can help you save money on taxes to some extent. The same can be said for retirement plans. Before you invest in one, make sure you’ll be able to take advantage of the tax advantages offered by the plan.
However, most pension plans do not exempt you from paying taxes on the interest or dividends you receive.
Make use of the Annuity Payout Calculator: The annuity payout calculator shows you how much money you’ll get from your pension over a set length of time. It will also indicate how much you should invest in order to receive the specified amount of pension when you reach the vesting age.
Select the Appropriate Vesting Age: Choose a pension plan with a vesting age that is appropriate for you. Some pension schemes have vesting ages that begin at 40 years old. So, if you’re looking for a way to make money early in life, consider a plan like this. However, there are plans that have a vesting age of 75 years, which is appropriate if you want to retire later.
Pension Amount Appropriate: It’s crucial to figure out how much annuity you’ll need after you retire, taking into consideration factors like inflation, rising living costs, and medical bills, among others.
Liquidity: While most pension plans have a lock-in period during which you are unable to withdraw your funds, other plans may allow some withdrawal flexibility.
Investment Amounts (Minimum & Maximum): Different pension plans have different limits on the minimum and maximum amount of money that can be put into the plan. As a result, you must examine the restrictions that are appropriate for your budget.
Additional Advantages: Most pension plans also come with a variety of riders/add-ons that can be used to increase the plan’s benefits.
Without a question, pension plans are an excellent way to establish a substantial corpus and live well after retirement. Other investing choices accessible in the market, such as mutual funds, Public Provident Fund (PPF), National Pension Scheme (NPS), direct equity, and so on, are far superior in terms of cost, returns, and so on.
As a result, it is critical to seek the advice of a fully registered and credentialed Certified Financial Planner and select the solution that best meets your needs, rather than relying on the opinion of a random individual or an advertisement campaign.

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The Most Important Pension Plan Facts