The Importance of Pension Funds: Secure Your Future with Steady Retirement Income

At a younger age, retirement planning may not be high on your priority list, as you might be of the mindset there is still a lot of time left. However, as age catches up with you, you might be in a hurry to save enough money for a comfortable life post retirement. As the golden years approach, the importance of a secure and comfortable retirement becomes increasingly evident. This is where pension funds come in handy. Now, you might be wondering, what is a pension fund? In this journey towards financial fulfillment, pension plans act as invaluable tools that provide a steady income stream during retirement. In this blog, we'll delve into the world of pension plans and their benefits.

What is a Pension Plan?

Before we move on to pension plans, let us answer the simple question of “what is pension?”. A pension is a fixed sum of money paid to you at regular intervals post-retirement. Pension plan, also known as retirement plan, refers to an investment plan provided by life insurance companies to create funds for retirement. These plans come with dual benefits - they offer investment as well as insurance coverage. Pension plan helps you convert a part of your savings into a long-term income once you have retired.

Types of Pension Plans

Finding the right pension plan can help ease your financial worries and help you look forward to your golden years without any uncertainty on what the future holds. Let us take a look at the different types of pension plans available in India.

Deferred Annuity

This pension plan allows you to build a retirement fund through a single upfront payment or regular installments over the policy term. Upon completion of the policy term, you begin receiving regular pension payments. While one-third of the accumulated corpus can be withdrawn tax-free, the remaining two-thirds are subject to taxation. The funds are locked in and cannot be accessed for emergencies. This pension scheme is particularly well-suited for salaried employees due to the option for regular premium payments.

Immediate Annuity

This pension plan provides you with an immediate annuity, which means that you start receiving pension payments as soon as you make a lump-sum payment. The amount of your pension payments is determined by the amount you invest. You have the flexibility to choose from a variety of annuity options under this plan. The premiums you pay towards this plan are exempted from tax. In the unfortunate event of the policyholder's passing, the nominee will continue to receive pension payments throughout the remaining policy term.

Pension Plans with Life Cover

Most pension plans incorporate life insurance coverage with an annuity option. In the event of the policyholder's death, the nominee will continue to receive the benefits. The primary goal of this plan is to provide a steady pension for the policyholder post-retirement. Additionally, the life insurance coverage safeguards the financial stability of the policyholder's dependents in case of their untimely demise. A portion of the investments in these types of pension funds is allocated towards providing risk coverage.

Guaranteed Period Annuity

This pension plan provides an annuity for a specified period, regardless of whether or not the individual dies during this period. The standard guarantee period is 5 years, but it can also be pushed to 10 years (multiples of 5), depending on the flexibility of the plan. Even upon the policyholder's passing, the designated beneficiary will continue to receive the annuity payments, thus ensuring financial support during the absence of the policyholder.

Annuity Certain

This pension plan provides an annuity for a predetermined period. For example, you can receive annuity between 60 to 70 years of age. In the event of the policyholder's passing before the policy's end date, the nominee will continue to receive annuity payments until the policy term expires. With these pension plans, you can achieve your retirement goals with ease, paving the way for worry-free golden years.

Life Annuity

By selecting a life annuity plan, you will receive continuous pension payments until your passing. You can also opt for the "with spouse" option, after which your spouse will continue to receive the annuity payment even after your demise. This serves as a means to safeguard your partner's financial future, especially if they are not employed. Establishing financial security will help mitigate the impact of any unforeseen circumstances that may arise.

Pension Funds

Pension funds are long-term investment vehicles that offer comparatively high returns upon reaching maturity. These plans are regulated by the Pension Fund Regulatory & Development Authority (PFRDA). You can choose to invest either a lump-sum amount or smaller amounts, after you will receive a consistent income stream in your post-retirement phase, thanks to these funds.

National Pension Scheme (NPS)

Utilized by the Government of India, this plan is one of the major types of pension schemes in India. It offers the flexibility to invest in equity or debt funds based on your risk tolerance. Upon retirement, you can withdraw up to 60% of your accumulated corpus, while the remaining 40% is utilized to purchase an annuity. NPS accounts are broadly categorized into two types - Tier I & Tier II.

Pension Plans under Mutual Funds

Mutual funds offer another avenue for individuals to save for retirement through pension plans tailored to meet long-term financial goals. These pension plans, often referred to as pension or retirement funds, are professionally managed investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, and other securities. The primary advantage of pension plans under mutual funds is the potential for higher returns over the long term compared to traditional fixed-income investments. Additionally, these plans offer flexibility in terms of contribution amounts and investment options, allowing investors to align their retirement savings with their risk tolerance and financial objectives.

Pension Plans under Post Office Schemes

Post office schemes offer a range of pension plans designed to provide individuals with a secure source of income during retirement. These schemes, backed by the government, offer guaranteed returns and low-risk investment options, making them popular choices for conservative investors seeking stability and reliability. One such pension plan offered by post office schemes is the Senior Citizens Savings Scheme (SCSS), which caters specifically to individuals above a certain age threshold. SCSS provides regular interest payments and capital protection, offering retirees a steady stream of income to meet their financial needs. Another option is the Post Office Monthly Income Scheme (POMIS), which provides monthly interest payments to investors, making it ideal for those looking for a steady income stream during retirement.

Benefits of Pension Funds

Pension plans come with a plethora of benefits that can help you enjoy a stress-free life post-retirement. Let us take a look at a few benefits of pension funds:

Guaranteed Income:

Depending on your investment plan, you can receive a fixed and stable income either after retirement or immediately upon investing (immediate plan). This ensures financial independence during your post-retirement life.

Liquidity:

While retirement plans are generally considered long-term investments with limited liquidity, certain plans offer the flexibility to withdraw funds during the accumulation stage. This feature provides a safety net in case of unforeseen expenses or emergencies, eliminating the need to rely on financial sources such as bank loans.

Flexibility:

Policyholders can choose to make contributions either through periodic installments or a single lump sum payment. Over time, this accumulated wealth will grow steadily, forming a substantial corpus to support their retirement years.

In the vast landscape of retirement planning, pension plans stand out as pillars of financial security. Understanding the various types of pension plans is crucial for individuals as they chart their course towards retirement. The ultimate goal of availing a pension plan is to navigate retirement with confidence and financial stability. A well-informed approach to retirement planning is key to a prosperous and fulfilling post-work life.