Planning for retirement may not be on every young person’s to-do list. However, as the years go by, you’ll realize that it should be a high priority in your life. The main reason for this is that a sizeable pension fund allows you to preserve your standard of living long after you’ve stopped working. Therefore, no matter the age you are right now, it’s important to ensure that you have an adequate pension plan in place.
With that said, how much do you know about the types of pension plans on offer? Do you know which pension funds have the most extensive benefits? It’s important to understand the definitions and advantages of various pension plans to ensure that you select the most beneficial plan for your retirement – to benefit you and your family.
Wondering what is a pension plan exactly? Essentially, a pension plan is a financial tool that helps you accumulate a pre-determined amount of money for the years following your retirement. Deciding to invest a regular premium ensures that you will build a considerable fund.
A pension plan refers to the money that you will use to live on when you retire from employment. While most people receive a fund from the government, this is often only enough to cover basic expenses. To enjoy a comfortable living, it’s always a good idea to save additional money by opting for one of the more lucrative types of pension funds.
In India, there are essentially two major categories for pension plans—government and non-government options. Their key differences are highlighted below.
Fortunately, the Government of India provides a few different types of pension plans to accommodate their retired population. Furthermore, these types of pension funds also provide a retirement fund for state employees. The most common national pension systems are listed below.
The National Pension Scheme is the primary pension scheme for government employees. With this type of national pension scheme, employees can invest premiums into their respective pension accounts at regular intervals.
Upon retirement, the insured can withdraw 60% of their savings. The remaining 40% can be used to purchase an annuity that offers periodic income. The NPS has a few appealing benefits:
The employee provident fund, or EPF, is a general government savings platform for employees who receive a consistent salary. As a monthly pension scheme, both the employee and the employer make equal contributions toward your EPF account.
The employee’s portion is deducted from their salary every month. Upon retirement, the insured will receive the total funds contributed by them and the employer as well as accrued interest.
There are also several non-government-backed types of pension plans in India. The 4 main types of pension plans are discussed below.
For the most part, the annuity type of pension plan allows the insured to receive an annuity at a specified date. Payments are made by the policyholder through a single or even as regular premium payments.
Another popular pension scheme is the immediate annuity plan. In this scheme, the insured deposits a lump sum amount and qualifies to receive the annuities immediately. The insured chooses from a wide range of annuity options as well as the specific amount to invest.
In the event of the policyholder’s death, beneficiaries will receive the benefits. Some of the other benefits of immediate annuity are:
A huge advantage of the various types of pension plans in India is that they include life insurance in addition to the investment component. This ensures that your family (or any other listed beneficiary) will receive a lump sum payout in the event of the policyholder’s death. This has two major benefits.
The first is that the policyholder has peace of mind knowing that their family will be taken care of in the event of their death. Secondly, providing the beneficiary with a lump sum payout ensures that the funds are not lost because the policyholder has passed away.
Unlike the other types of pension plans, the policyholder in this instance receives the annuity for a specific number of years. The insured chooses the payment period (annuity term) based on what’s convenient for them. As with the immediate annuity, the appointed beneficiaries will receive the benefits in the event of an unfortunate event.
Top 5 Considerations Before Purchasing a Pension
Not all pension plans are the same. While the general concept may appear similar, it’s important to review the key differences to determine which plan will produce the best retirement corpus. The top five considerations to consider are discussed below.
When opting for a pension scheme, the policyholder will have two options:
A sum assured refers to a fixed amount that is paid to the beneficiary or nominee in the event of the policyholder’s death. It’s important to opt for a pension scheme that offers this type of cover for the family members that remain when you pass.
For the most part, an accumulation period refers to the time period in which policyholders make contributions to their pension plan. The money then serves as an investment method in retirement savings.
This refers to the period that you will be required to pay funds into the pension scheme. In addition to the period, check if the policy requires a once-off lump sum or rather smaller, monthly payments. Which will suit your current financial circumstances better?
Essentially, the surrender value refers to the actual sum of money the policyholder will receive if the policy pays out. That means, what is the cash value of the policy? Enquire about the factors that affect this to determine which will be most beneficial to you and your family.
Investing in a lucrative pension plan is a proactive way to ensure that you and your family will be able to maintain the standard of living you’ve become accustomed to. Understanding the pension plan types makes it easy to build and grow a lucrative retirement corpus.
Pension refers to the money you will be entitled to once you reach retirement age. Ideally, the goal of a pension plan is to maintain the standard of living you have become accustomed to before retirement. You can either be part of an employee pension scheme or opt for a private pension plan with life cover.
A pension plan is a retirement account that is primarily sponsored and funded by your employer. Contributing to a pension plan ensures that employees have future funds to rely on after they reach retirement age. The amount of money you invest into the plan will determine the type of retirement corpus you have available upon retirement.
Having a pension plan ensures that you will have sufficient money to live on after retirement. If you receive money from a government pension scheme, a private fund will ensure that you do not have the basics covered but will also afford you a comfortable life. This can be very beneficial with rising inflation costs.
The four most prominent types of pension plans are listed as:
Choosing the best pension plan depends on the type of benefits you want in your retirement years. It’s a good idea to compare benefits and costs before deciding on the right retirement plan.
There is no hard and fast rule about the right date for setting up one of the more effective pension plan types. However, it’s always recommended to start as early as possible as this will give you more time to accumulate a substantial amount for when it’s needed.
Disclaimer:
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
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