The rising cost of living, new aspirations, and the trend of retiring early means creating a robust retirement plan.
Retirement plans, also termed pension plans, are insurance-led investments that secure your investment from market volatility. These plans help you accumulate a sizable corpus over a period for a comfortable retirement for a certain number of years. When you invest your earnings in such plans, the insurer invests these earnings in the mix of market instruments to generate income during your retirement period. It is an affordable way of retirement planning.
Option to Receive Staggered Income
The main attraction of a retirement pension plan is the regular and fixed income during your golden years. You have the option to withdraw the entire corpus in a lump sum or withdraw every month.
It helps you to meet all your expenditures during retirement. You can live a financially independent life, whether it’s a vacation and pursuing a hobby or meeting your day-to-day expenses as you receive a monthly income.
You can secure your retirement with the following benefits of your retirement pension plans:
- Financial independence without depending on your children
- Regular income to maintain your lifestyle
- Financial security for your family with an in-built life cover.
- Overcome shortfall of corpus from provident funds and gratuity if they shortfall in the long run.
- Withdrawal in the accumulation stage to meet urgent needs arise out of emergencies
- Tax benefits on premiums paid towards retirement plans under Section 80CCC, Income Tax Act, 1961.
It is always considered best to start as early as possible as it helps you accumulate corpus with smaller amounts. Let us move towards how to buy retirement plans.
1. Determine the required pension amount
You must save and invest an amount as per the desired pension amount. To figure out the required amount, you need to consider inflation and your future expenses in daily life. It can be your medical expenditures or meeting the needs of your dependents. Inflation brings down the value of money with time. Therefore, inflation plays a vital role in figuring out the pension amount. You can use an online calculator to get an approximate figure.
2. Figure out the corpus you want for wealth accumulation
Like pension amounts, you should know the approximate corpus or periodic payments you need to accumulate and invest accordingly. These will depend on your post-retirement necessities, the number of dependents, liabilities or debts like a loan, and inflation.
3. Know the premium payment period
The insurer fixes the premium amount for a retirement plan based on your choice of plan, age, and lifestyle. It is inevitable to know the time you need to pay premiums for your investments. It simply helps you be better prepared with the required money for timely premiums and continued plan benefits.
4. Choose from participating vs non-participating pension plans.
When you invest through a participating retirement pension plan, you need to pay a higher premium than a non-participating plan. Participating in pension plans offer you the profits earned by the insurer in the form of dividends and bonuses. In contrast, a non-participating plan provides only guaranteed benefits.
5. Know different pension plans and understand their methodology before selecting one
Choose the right plan based on your requirements. For example, many individuals require a pension immediately, and many others may require it after some time inequitable payments. For an immediate pension benefit, you need an immediate retirement annuity plan, and if the pension requirement arises after a certain number of years, you can choose a deferred annuity.
Types of Retirement Pension Plans
Deferred Annuity Plan
A Deferred Annuity plan accumulates wealth to buy an annuity at the time of retirement. There can be a systematic premium over the term or a one-time payment method to purchase annuities. There will be no taxation unless you withdraw the amount. It can be Fixed, Indexed, and Variable where the rate of return differs.
Immediate Annuity Plan
These annuity plans offer immediate and assured income with lump-sum investment, i.e., the purchase price of the annuity is to be paid in a single premium. The premium is tax-exempted.
Life Annuity Plan
It is the option with Joint-Annuity. The spouse continues to receive annuity even after the policyholder’s demise.
Annuity Certain Plan
Here the pension or guaranteed retirement income is paid for a specific period, and the nominee can claim the benefit after the policyholder’s death. Since the expiration date is fixed here, you can expect higher returns than other traditional annuities.
With Cover Pension Plans
Retirement pension plans are also available with a life cover and without a life cover. In a plan without cover, the nominee is paid the corpus built during his lifetime. A lump sum is paid to the nominee in the covered plan upon the policyholder’s death.
Guaranteed Period Annuity
It is a plan with guaranteed returns and annuity disbursed for specific terms like 5 – 20 years.
Pension Funds offer high returns and require a significant amount to be invested than other retirement plans. There are six fund houses in India offering pension funds, regulated by the PFRDA (Pension Fund Regulatory & Development Authority).
National Pension Scheme (NPS)
The Central Government manages the NPS where the invested money is invested in equity and debt markets based on the investor’s preference. You can withdraw 60% of the fund on retirement. The rest, 40% of the fund, is used to buy the annuity. With its tax-saving benefit and government back, it is quite popular.
There are widespread categories of Retirement pension plans. You can find and compare various other plans also.
Bonds – Alternative for long-term retirement plans
One can invest in bonds with long-term maturity and deep discount bonds for secured retirement. Bonds are suitable investments for young investors as well as for those who are close to retirement and seeking a stable return.
Bonds provide –
- Stability to your portfolio
- Regular income in the form of interest regularly
- Security with high-grade options
- Tax benefits