Pension Plan – Concept, Need, Related Terms, Best Plans & moreLast Updated Date: Nov 17, 2022
In this article, we will talk about everything that you should know about Pension Plan, starting with an overview.
Then, we will move forward by explaining why you should get a Pension Plan post-retirement. What are its benefits, and what are the best Pension Plans available in India right now? So, stay tuned.
Planning a post-working life is always challenging. As there are infinite possibilities that you can face in your lifetime, there is no guaranty how your life can be after retirement.
Therefore, one thing you should always consider is to be financially stable even after you hang up your boots.
Now, if you work in a government organization, there is a possibility that some sectors can provide monthly pensions after you retire from your job.
However, even that is not certain in our country. So, the big question is how to survive this uncertain future? The answer to that is via Pension Plans.
Pension Plan – An Overview
When you join a job at the age of 23-25, you never consider getting a Pension Plan. For those who are unsure of what it is, it is primarily a strategy.
It is a financial strategy that would let you receive the required amount of money to secure your future. Of course, you might have an obvious question in your head – how much money do you need?
The sad thing is there is no direct answer to that question. There can be numerous factors that eventually decide how much is sufficient for you.
That can pretty well be dependent on what lifestyle do you lead right now, and how you wish to live in future. Of course, this factor is directly proportional to your current income.
Pension Plan is a lot about predicting the future. Based on that, you need to create a full-proof plan to give yourself the change to not only stay afloat but to live a prosperous life afterwards.
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Why do you need a Pension Plan?
There are several reasons which should compel you to get a Pension Plan. The core idea here is to protect your future from every financial crisis that you can fall into this uncertain future.
So, take a look at these factors below:
The cost of every goods and service that we consume will go up – this is a universal fact. Now, recent studies are indicating that the inflation rate has gone up 14-15% since 2017.
So, the expenses will always go high no matter what. Therefore, it is pivotal for you to keep up the pace, even at an old age. Thus, a well-curated Pension Plan is right next to mandatory.
Staying healthy should be the number one priority in life. Yet, more often than not, we can get caught up with severe diseases.
So, even if you consider yourself fit, you can guaranty that. The inflation in buying medicines are sky-rocketing almost every month.
On top of that, if you contract any major disease, you may lose everything that you have saved throughout your life.
So, we strongly recommend a Pension Plan which has massive medical expense coverage.
We live in a country where the government has already surrendered on the retired elderly persons. Apart from a few government organizations, you will not get any form of monetary assistance.
That itself is a strong reason to opt a Pension Plan to be self-sustainable. Apart from that, there are so many kinds of emergencies that you can face which need immediate financial backup.
Therefore, a Pension Plan is a must-have.
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What are the various terms used in a Pension Plan scheme?
The whole idea of getting a Pension Plan is to build up the corpus that would let you sustain your life without financial worries.
Apart from that, take a look at some of the invaluable reasons to opt a Pension Plan:
An Annuity is the tentative sum of fund that you typically receive every year till the time you die. It is the most significant reason for getting a Pension Plan.
The Annuity is the core purpose of you investing your hard-earned money. Now, there are two different forms of Annuity which you should be aware of – Deferred and Immediate Annuity.
We have already covered both these categories before. As the Immediate Annuity ensures instant fund release, which is typically lump-sum, the Deferred Annuity splits the amount and pays you on your defined interval.
Since most of the Pension Plans does come with life insurance coverages, the policyholder typically receives payment upon the maturity of the policy.
That specific amount is the Sum Assured amount. Meanwhile, your family member can also claim the Sum Assured money, in case you are no longer alive.
The amount is usually set aside by the insurance companies, which works with the Pension Plan companies in tandem. The amount that you will receive may vary in several aspects.
There are differences in opinions as well – some say the Sum Assured is 10 times of the premium account, while some say it is closer to your Corpus.
Now, since it is a part of the Pension Plan, who doesn’t want extra money?
The Vesting Age is your tentative age where you are eligible to receive monthly pensions. Now, the Indian companies typically set the Vesting age between 45 to 50.
That said, there are companies that offer the Vesting Age of 70, sometimes even up to 90. Now, it all depends on how you set up the plan.
Accumulated Periods referred to the actual years that you have invested your hard-earned money on a particular Pension Plan.
Say, for instance, you are 25 and have started investing, and you keep on investing money till you are 55. So, the Accumulated Periods in 30 years.
Now, in context to how it benefits you, it is the total accumulated fund alongside a massive compound interest.
Believe it or not, that would be your best friend in the uncertain future ahead.
Many of you should have guessed it by now, the Payment Period is the time-frame when you get the pension.
Suppose you retire at the age of 60, and you live up to the 75. So, for the companies, the Payment Period 15 years.
What you should know is that most of the companies keep the Accumulated Period different from the Payment Period.
Meanwhile, there are loads of companies nowadays that offer you to make a withdrawal of the entire or partial amount as per your convenience.
That, however, can very well be inside the Accumulated Period.
The Surrender Value is a testament to a failed Pension Plan. It is an amount that you will receive from the insurance company while you are surrendering the Pension Plan.
So, you will only receive the amount you have invested in a particular scheme.
Apart from that, whatever the commitments the company has made with you while you purchased the Pension Plan, will become null and void.
They are not liable to provide any privilege which the plan originally has.
Learn in detail about all Pension & Savings Schemes here
What are the Types Pension Plans in India?
As every lock has a different key, every retiree has his own priorities.
Based on this concept, several companies do sell Pension Plans, which has a particular Corpus and various other coverage schemes.
Thus, we have articulated some of the best categories of Pension Plans, which are widely available in India right now:
Deferred Annuity is one of the conventional forms of Pension Plan, where you will get a guaranteed amount at the time of the policy maturity.
You can either pay the policy premium every year or at one go.
You need to know that Deferred Annuity Pension Plans are typically long-term investments. The plan is less complicated and can yield decent returns.
As the name suggests, the Immediate Annuity plan is designed to provide you with the financial backup immediately to the assigned nominee in case you die.
Of course, the premium amount, as because of that immediate disbursement feature, is relatively higher than most other Pension Plans.
One of the positive aspects of getting this plan is to avail great tax benefits.
Annuity Certain is a Pension Plan which you can customize as you wish. You need to set the number of disbursements which you will receive after you retire.
You need to consider two factors here. One, you will only get a specific number of financial disbursements, which you must have to set at the time you buy this plan.
Two, the cost of its premiums is relatively higher than most conventional Pension Plans.
With & Without Cover
The primary difference between a With Cover and Without Cover Pension Plan is the former contains Life Insurance feature included, while the latter doesn’t.
Other than that, there is no core distinction among this category of Pension Plans. However, the Coverage amount that comes with a With Cover Premium Plan is not significantly high.
Meanwhile, in case you passed away, the nominee you chose will get the corpus amount at the time of your death.
Guaranteed Period Annuity
This category of Pension Plan is pretty straightforward. The annuity amount is provided to the policy-holder at its maturity.
Now, it doesn’t matter where you are alive to get it or not, but the annuity is guaranteed, and you or the nominee you chose will get that. Additionally, you will also get coverage for Life Insurance.
The Life Annuity Pension Plan justifies the core value of a Pension Plan along with Life Insurance. Here, you will only get the annuity amount if you die.
So, there is no maturity amount that you will get, which most Pension Plans have.
When the plan is triggered, your assigned nominee, which most case, your spouse, will get either a lump-sum amount or split payments.
National Pension Scheme
The National Pension Scheme (NPS) is one of the most trending forms of Pension Plans in India right now. Once it was only for the government employees, then revised for everybody.
The concept is simple – at the time of retirement, you will get 60% of the invested amount. The other 40% goes to the processing and service fees of the annuity.
The Pension Fund is one of the concrete strategies to make while you are planning retirement.
Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), this is a well-thought plan, which not only offers a significant raise to most pre-existing Pension plans.
This plan is for those who understand how everything related to the Pension Plan works, and are also willing to take a bit of risk.
Ultimately, this is a customized Pension Plan for those who have got loads of experience or have studied the matter minutely.
Whole Life ULIPs
Whole Life ULIP is a decent Pension Plan, which has a unique way of financial dealing.
Unlike most Pension Plans where you will get financial assistance, the invested amount will stay invested even after the maturity.
You can make withdrawals under the stated terms, at any point in time. The best part is the money that you withdrew will be tax-free.
You can also make additional withdrawals, assuming you are allowed to.
Conclusion – Pension Plans
Every Pension Plan has its benefits and also has its fair share of flaws. What you should consider it where your priorities lay.
Another aspect that you should check is the past reviews of a company. How many positive reviews that the company has accumulated?
How many negative ones as well; this would reveal the overall experience level of the company.
One thing you should understand is you should need to start building towards that corpus as early as possible, even if it is not your priority right now.
It would be best if you remember that you can only plan your Pension scheme once in your lifetime.
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