Pension Plan

Pension or retirement plans offer the dual benefit of investment and insurance cover. By investing a certain amount regularly towards your pension plan, you will accumulate a considerable sum in a phase-by-phase manner. This will ensure a steady flow of funds once you retire.

Public Provident Fund is one of the most popular retirement planning schemes in India. When you start contributing to your retirement early, the funds build a secure golden year money-wise over the years. A well-chosen retirement plan can help you rise above inflation, thanks to the power of compounding.


Who should opt for Pension Plans

Every individual should invest in pension plans to secure their retired life financially. Section 80C of the Income Tax Act, 1961, covers several retirement plans and taxpayers are eligible for tax deductions of up to Rs.1.5 lakh. Any plan you choose must be in sync with your investment goals (or retirement plans). For example, if you wish to retire early, then your corpus upon maturity should be enough to support your retired life. Hence, the key is to choose the retirement plan smartly.

Features & Benefits of Pension Plans

Guaranteed Pension/Income

You can get a fixed and steady income after retiring (deferred plan) or immediately after investing (immediate plan), based on how you invest. This ensures a financially independent life after retiring. You can use a retirement calculator to have a rough estimate of how much you might require after retiring.


Tax -Efficiency

Some pension plans provide tax exemption specified under Section 80C. If you wish to invest in a pension plan, then the Income Tax Act, 1961, offers significant tax respite under Chapter VI-A. Section 80C, 80CCC and 80CCD specify them in detail. For instance, Atal Pension Yojana (APY) and National Pension Scheme (NPS) are subject to tax deductions under Section 80CCD.


Retirement plans are essentially a product of low liquidity. However, some plans allow withdrawal even during the accumulation stage. This will ensure funds to fall back on during emergencies without having to rely on bank loans or others for financial requirements.


Vesting Age

This is the age when you begin to receive the monthly pension. For instance, most pension plans keep their minimum vesting age at 45 years or 50 years. It is flexible up to the age of 70 years, though some companies allow the vesting age to be up to 90 years.


Accumulation Duration

An investor can either choose to pay the premium in periodic intervals or at once as a lump sum investment. The wealth will simultaneously accumulate over time to build up a sizable corpus (investment+gains). For instance, if you start investing at the age of 30 and continues investing until you turn 60, the accumulation period will be 30 years. Your pension for the chosen period primarily comes from this corpus.


Payment Period

Investors often confuse this with the accumulation period. This is the period in which you receive the pension post-retirement. For example, if one receives a pension from the age of 60 years to 75 years, then the payment period will be 15 years. Most plans keep this separate from accumulation period, though some plans allow partial/full withdrawals during accumulation periods too.


How a Retirement Plan Works Example:

Priyanka is 32 years old with an expected lifespan of 80 years. Her current salary is Rs.50,000 and she wishes to retire at the age of 60. She is looking for a monthly pension of Rs.30,000 post-retirement. How much do you think she should invest until the age of 60 to meet her investment goals?

Priyanka will need a corpus of Rs.4.05 crores to receive an income of Rs.30,000. Let us assume a long-term return of 12% till age 60 and 5% after that, with 6% inflation rate. Based on these figures, she must invest Rs.14,820 monthly for the next 28 years. If all goes according to plan, Priyanka is going to lead financially secure golden years. You may also use this retirement planning calculator to arrive at a number.


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