Retirement Insurance

What is Pension Plan?

Retirement is a phase when you want to relax and enjoy your life after continuous, long and hectic professional life. On the financial front, your regular income also stops. Managing post retirement expenses may become hard for you with growing inflation. Only 4% of the total working population of India is covered by a pension scheme, usually government employees. The remaining population is either salaried or self employed who do not have the provision of a formal pension scheme.

Ideally, life insurance covers the risk of “dying too early “ or “living too long”. Pension Plans being a part of life insurance products cover the risk of living too long. Insurance companies provide the dual benefits of pension and insurance cover under pension plans. Pension plans help individuals to plan for their retirement effectively and provide individuals with a regular income for their post retirement years. Also, in the event of the death of the insured, the amount specified as per the policy is paid to your nominee. A pension plan helps you achieve the financial stability after your retirement. You need to infuse a specific amount of money during your working phase to build a corpus.

These plans are best for those planning a secure future. Retirement plans are a decisive way of safeguarding that your current lifestyle is maintained even after you stop working.

Why should I buy Pension Plan?

Here are the top reasons as to why you should buy Pension Plan.

Lead an Independent Life
The days are gone, when retirees used to depend on their children or other relatives. Now, people are looking to lead an independent life and for this, there is a need for enough savings. You need to invest prudently with the best pension plan that is the best fit.

To Attain Surplus Funds
Investing with your employer-run pension scheme is a wise move, but unfortunately, the corpus it provides may not be enough to maintain your lifestyle post retirement. That’s why you should go ahead to invest in a pension plan.

Not Enough Govt. Schemes
Not all of the Indian population is covered under the social security schemes, and the schemes are also limited. Thus, there is an urgent need to invest and buy the best retirement plan that can provide you a corpus at the retirement to meet any contingency.

To Get Dual Benefit
Pension plan offers a dual benefit of insurance and pension both, out of your invested amount towards the pension plan.

To Confront Inflation
Inflation has a double impact on your savings. Inflation affects your current purchasing power and also augments financial requirements for the future. Saving appropriate amount regularly towards pension plan will help you confront the impact of inflation.

Increased Life Expectancy
Improved and easy access to the advanced medical and healthcare facilities has helped people to live longer. After the retirement, you also need to acquire enough savings to survive a good life. Pension plans cover the risk of living too long.

Phases in a Pension Plan

Pension plans offered by insurance companies provide the dual benefits of investment and insurance. A pension plan includes two phases.

Accumulation Phase: In this phase, you tend to invest and accumulate the wealth during the term of the policy. Your funds are invested in securities or other investment avenues as approved by the insurance regulator, IRDAI by the insurance company.

Distribution Phase: In this phase, you tend to consume the already accumulated wealth. This phase most probably begins at the time of your retirement. Some may prefer to withdraw the money even before their retirement.

What kinds of Pension Plans can I opt from?

There are types of pension plans available basis the following parameters

Basis the Need Appetite
Basis the need and requirement, you may choose the annuity type out of immediate annuity or deferred annuity pension plan.

  • Immediate Annuity Plans: Under this plan, the annuity/pension commences immediately after the payment of premium in one lump sum. You will start getting your annuity/pension on an immediate basis after giving the lump sum amount to the insurer.
  • Deferred Annuity Plans: As the name suggests defer means to postpone, so under this pension plan, you pay the premiums for a specific time period as per your chosen retiring or vesting age. The money accumulated is then used to pay annuities that help you as a regular source of pension.

Basis the Risk Appetite
Basis the risk appetite, you may choose to opt to buy either a traditional pension plan (low risk) or unit linked pension plan (high risk).

  • Traditional Pension Plans: Such pension plans are for those who are looking for a safe and secure return on the money paid towards buying a pension plan. When you opt a traditional pension plan, your money is majorly invested in government bonds and securities by the insurer. The insurer pays a steady return on your investment. In case you have a conservative approach and want your money to be safe, it is prudent to go for the traditional plans.
  • Unit Linked Pension Plans: These plans are market linked pension plans. For people having a higher risk appetite, this is the ideal pension plan for them. Under this plan, the investment steering is in your hands and not in the hands of the insurer. You may choose between debt or equity or balanced fund for the growth of your invested amount towards pension. The pension is paid out of the total fund value created at the end.

Basis the Need for Life Cover
Basis the need and requirement, you may choose the annuity type out of immediate annuity or deferred annuity pension plan.

  • Pension Plan With Life Cover: When you choose a pension plan with life cover. You get insurance and pension benefit together under one umbrella product. Premium paid will have the component of insurance (for life cover) and investment (for building the corpus for pension). So in the event of death during the policy term, the nominees will receive the sum assured opted under as life cover.
  • Pension Plan Without Life Cover: When you choose a pension plan without life cover, the premium you pay will entirely be utilized for the purpose of building a corpus for pension pool. In the event of the death of the policyholder, your insurer will pay the corpus accumulated in the pension plan to the nominee. It does not provide any sum assured as such policies are without life cover.

What are the Benefits of Buying a Pension Plan?

There are several benefits of buying a Pension Plan.

Maturity/Vesting Benefits: In pension plans, you have the option to withdraw the one-third of the corpus at the maturity known as “Commutation”. The remaining two-third of the entire amount is used to pay annuity that you would receive as a monthly income after the retirement.

Annuity Benefits: On the attainment of the vesting age, a pension plan provides you the annuity benefits with which you can get a regular pension amount monthly. Annuity benefits are payable as per the annuity option is chosen by you at the inception of the policy.

Death Benefits: The accumulated corpus in a pension plan is paid to the nominee in the case of the death of the life insured as Assured Death Benefit with guaranteed returns. The nominee can opt in most of the plans to utilize the death benefits in two ways. Either by taking the death benefit as a lump sum or take the requisite amount of pension out of the total corpus available in the policy.

Surrender Benefits: Pension plans do offer surrender value or benefits in times of exigencies after paying applicable surrender charges, if any.

Tax Benefits: The premium amount paid towards a pension plan is eligible for tax deduction under Section 80 CCC. Under a pension plan, the one-third of the total accumulated amount at its maturity is treated as tax free and can be withdrawn by the policyholder before starting of the pension.

What is Not included in the Pension Plan?

If a policyholder commits suicide within one year of commencement of a pension plan, no or limited benefits will be payable.

Do’s and Dont’s in Pension Plan

Read the do’s and dont’s related to your Pension Plan.

Take the right term of the policy for getting the benefits for your child at the right age

Start saving for your pension plan at an early stage. The earlier you act, higher will be your pension funds. Hesitate in clarifying any query regarding your pension plan.
Study about the fees and charges levied on your pension plan. You may ask your pension provider to get the details regarding charges levied on your account. Forget to read the fine print of your pension plan. Any negligence today may cost your savings for tomorrow.
Make additional top up contributions to boost your pension savings. Feel coerced by a financial advisor to buy a pension plan which is not best fit for you.
Monitor the performance of your pension fund. Allow agent advisor to fill the pension proposal form. Fill it in by yourself.
Opt for the pension option as per your post retirement needs. Take a risk with your pension fund. Invest as per your risk appetite.