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What is Pension Plans ?
Every one are worried about our income when we retire. Pension Plans, also called Retirement Plans are one of the safest ways of a trouble-free retirement life. Invest small amounts today while you are earning and receive fixed annual payouts during your retirement years. You build your kitty by investing small amounts regularly in your earning days and then use that kitty to buy an Annuity on retirement. The annuity will ensure the regular payouts during your golden years of retirement.It is best to start planning for your retirement as early as possible because these small amounts contributed today will become a large sum of money over the years. Pension Plans are flexible and can be used effectively if planned out well. On attaining the retirement age, the policy holder can withdraw 33% of the maturity amount for some immediate financial needs. The balance amount is used to purchase an annuity which gives a regular monthly/annual income.These policies are most suited for senior citizens and those planning a secure future, so that you never give up on the best things in life.
Pension Plans come in 2 variants - Traditional plans in which the amount of payout is almost guaranteed and ULIPs in which part of the amount paid as premiums every year is invested in financial instruments which are known to appreciate handsomely over a long period of time. If your investment horizon is 10 years and more, it may be advisable to go in for a ULIP based pension plan. If you are completely risk averse, it maybe better to go with traditional pension plans.
The common features of pension plans:
1. Guaranteed pension: Pension plans give a fixed and steady income after retiring, or immediately after investing, depending on the plan chosen. Thus, you can enjoy a financially independent retirement life.
2. Tax-efficiency: Most pension plans offer tax exemption under Section 80C, 80CCC and 80CCD of the Income Tax Act, 1961.
3. Liquidity: Retirement plans have low liquidity. Some pension plans offer premature withdrawals subject to conditions like tax implications and penalties.
4. Vesting age: This is the age when you start receiving the monthly pension.
5. Accumulation phase: This is the phase where you have to make investments. Investments can be made in lump sum or installments. In this phase, investments accumulate and wealth is created. Generally, only a few plans allow withdrawals during this phase.
6. Payment period: This is the period in which you receive the pension after retirement. Most plans keep payment period separate from the accumulation period.
7. Surrender value: This is the value that you get on surrendering a retirement plan before maturity. This is not a smart move as you lose certain benefits of the plan including the sum assured and insurance cover (if the plan offers any).
8. Limited tax deductions: Retirement plans offer attractive tax benefits. However, the deductions are restricted to the ceiling limits of the respective sections of the Income Tax Act.
9. Taxation on returns: The maturity proceeds of most retirement plans are taxable.
10. High returns demand high risk: If you expect high returns and high-payout at the time of retirement, you have to assume high risk in terms of market fluctuations.
The benefits of retirement plans:
1. Option in investment: Certain retirement plans give you the option to invest in government securities, debt and equities depending on your risk profile.
2. Long-term savings: Retirement plans are long-term savings schemes. Returns are assured.
3. Choose your payouts: You can choose how you wish to receive the annuity payments, either as a lump sum or installments.
4. Works like a life insurance cover: Certain pension plans pay a lump sum on retirement or on death, whichever is earlier. Pension plans work just like a life insurance plan.
5. Negates inflation effect: As retirement plans are for the long-term, the effect of inflation is negated.
6. Access funds during an emergency: Most pension plans allow you to access funds for emergencies.
7. Loan against retirement plans: Certain retirement plans sanction loan against the retirement corpus.