Retirement Planning Through Pension Plans

What is Retirement Planning? Retirement Planning refers to the process of allocating funds for retirement. Retirement planning is in a way preparing you to financially remain independent even when paid work ends or when the regular flow of income ends. This process involves identifying future sources of income, making estimates about the future expenses, making and implementing a savings program.

Pension Plan is a kind of retirement plan that is usually exempt from tax, and the contributions towards this plan is made by the employer and is further invested on behalf of the employee in order to provide benefits to the employee upon his/her retirement. Various pension plans are offered by different insurance companies and that helps when you plan your retirement portfolio.

Importance of Pension Plans
Though the financial needs of all individuals vary significantly from each other yet some room should be kept for fund allocation towards pension plans during portfolio planning for retirement. Pension plans undoubtedly serve as secured means in providing financial stability after retirement.

Firstly, pension plans help in attaining Financial Independence. Pension plans, as stated earlier, help you in attaining financial independence when your paid-work ends. You can continue with the kind of lifestyle you have been living with for all these years and you will have means to fulfill the small little fancies of your wife and grandchildren. All in all, you won’t have to think twice before buying something or splurging a little.

Another point to keep in mind the increasing life expectancy - investing in pension plans may come handy and sustain you through your golden days.

All personal consultants will tell you to start investing early in if you wish to reap maximum benefits from your pension plan. Your future income will depend on how much you invest today. Pension plans not only help you sail through easily in your golden age they also provide you with tax benefits under the Income Tax Act 1961.

Immediate Annuity Plans are ones which start reaping you the benefits from day one. This means that after making a lump sum contribution towards your plan you start receiving the annuity. So, if you have a reasonably large amount at your end, you may invest in immediate annuity plan and start receiving pension immediately. HDFC Immediate annuity, LIC Jeevan Akshay, ICICI Pru Immediate Annuity etc are all examples of Immediate Annuity Plan. There are different categories of immediate annuity plans.

Annuity Certain: The policyholder gets a fixed sum of money for a certain number of years from the insurance company.

Guaranteed Period Annuity: Under this plan, the insurance company pays the policyholder pension for a certain number of years as opted under the plan even if they do not survive this period. Let’s understand by an example - if a certain policyholder opts for 10 years and dies after 4 years of purchasing the policy, their nominee will receive the pension amount for the remaining 6 years.

Life Annuity: The policyholder gets paid a specified amount regularly through their life. There is an option of 'return of purchase price' under this policy wherein the beneficiary/nominee will get the maturity amount plus any bonus upon the policyholder's death.

The second one is Deferred Annuity Plan. In this plan you need to first pay a fixed sum of amount for specified number of years and you start reaping the benefits after retirement in the form of pension. This follows a simple mechanism - if a policyholder survives the full term of the policy, then the total amount consisting of the sum assured, guaranteed additions and bonuses is invested by the insurance company to generate regular income for the policyholder. New Pension Scheme (NPS), LIC Jeevan Nidhi, LIC Jeevan Tarang, Bajaj Allianz Swarna Raksha ROC etc are all examples of deferred annuity plans.

However, experts do not generally advice you for investing in deferred plans. The reason behind this is that when you start planning in an early age towards your retirement you may come across better options of churning capital gains and accumulate wealth for your old age. Another point that works against deferred annuity plans is the unpredictable returns. Insurance companies are not able to give you a clear picture about the amount that you will receive as pension when you retire. They focus more on giving “a pension” than on “how much you get.”

It is always advisable that prior to investing in pension plans you should first click a clear picture of your expected future financial requirements. Pension plans may, at times, seem complicated and buying one may seem a difficult task. In such a case seeking advice from an expert may prove to be beneficial. It’s a matter of your future and you need to invest diligently. After all your future luxuries and standard of living is at stake.