Navigating Your Retirement: The Types of Pension Plans You Should Know About

Getting ready for retirement is something we all think about, but figuring out pension plans can be a bit tricky. In India, there are various types of pension schemes made to suit everyone’s needs. Let’s simplify things and talk about some of the main pension plans you should know about as you plan for a secure retirement.

Popular Pension Plans in India

Some common types of pension plans are as follows:

1. National Pension Scheme (NPS)

It is a government-sponsored retirement plan open to all Indian citizens within the age group of 18 and 65. You can contribute to NPS through your employer or as an individual. You can choose from different investment options: equity, corporate bonds, government securities, and alternative assets. You can also select your fund manager and change it once a year.

The NPS has two types of accounts: Tier I and Tier II. Tier I is the mandatory account that offers tax benefits under Sections 80C and 80CCD. You can only withdraw from this account once you reach the age of 60, except in some exceptional cases. Tier II is a voluntary account that allows you to withdraw at any time but does not offer tax benefits.

Upon retirement, enjoy a tax-free lump sum withdrawal of up to 60% from your NPS corpus. The remaining 40% must be allocated to purchase an annuity plan from a life insurance company, ensuring a steady and regular pension for you. You can also defer your withdrawal or annuity purchase up to the age of 70.

2. Pension Funds

Pension funds are another pension scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Six pension fund managers in India offer different types of pension funds, such as equity, debt, hybrid, and solution-oriented funds. You can invest in these funds through a lump sum or regular installments, for a fixed duration or until retirement.

Pension funds allow you to benefit from the power of compounding as your money grows over time. You can also switch between different funds as per your changing needs and preferences. You can withdraw the whole amount or stay invested and receive regular income after retirement.

3. Defined Contribution

A defined contribution plan is a retirement scheme that some employers offer to their workers. In this plan, both the employer and the worker pay a certain amount of their salary to a retirement fund, which is invested in different assets. The worker can select from various investment options, such as stocks, bonds, or mixed funds.

The pension that the worker gets after retirement depends on the performance of the fund and the total amount saved. The worker can take up to one-third of the amount as a one-time payment and use the rest to buy a plan that will give a regular income for life.
Defined contribution plans benefit workers who want to save for retirement and get tax benefits under Section 80C. However, they also have some drawbacks, such as the lack of assured returns, the unpredictability of the future pension amount, and the reliance on the employer’s payment.

Guaranteed Period Annuity Plans

Guaranteed period annuity plans are a type of pension scheme that guarantees a regular income for a fixed period, regardless of your survival. You can choose from different periods, such as 5 years, 10 years, or 15 years.

The amount of pension you receive after retirement depends on the period, the interest rate, and the payout duration. You can also opt for different payout options, such as life annuity, joint life annuity, or annuity certain.

Guaranteed period annuity plans are helpful for investors who want to ensure a steady income and enjoy tax benefits under Section 10(10A). However, they also have some disadvantages, such as low returns, the charges levied by the annuity provider, and the risk of losing money if you live longer than the guaranteed period.

Deferred Annuity Plan

A deferred annuity plan is a pension scheme that lets you invest a certain amount of money, either as a lump sum or in regular payments, for a fixed duration. After you reach a specified age, you start getting a steady income from the plan. You can select different kinds of annuities, such as those that offer a fixed, variable, or indexed rate of return.

The pension amount you get after retirement depends on the annuity type, interest rate, and payout period. You can also choose different payout modes, such as receiving the pension for your lifetime, for your and your spouse’s lifetime, or a fixed number of years.
Deferred annuity plans suit investors who want to delay their tax payments and avail of tax benefits under Section 80C and Section 10(10A). However, they also have some disadvantages, such as low flexibility, low profitability, and the fees charged by the annuity provider.

Conclusion

Navigating the landscape of pension plans in India involves understanding the various options available and aligning them with your financial goals. Whether you are a salaried employee, a self-employed individual, or a senior citizen, there is a pension plan tailored to meet your specific needs.