Pension Plans: Live Stress Free Once You Retire

A pension plan is an insurance product that generally gives you a fixed income after you have retired. Most financial advisors will recommend buying a pension when you start your career as the compounding power of interest over the years enables you to get a handsome corpus.

The Indian pension system is a legacy of the British Raj. The Royal Commission first awarded pension benefits to government employees, in 1881. These schemes were later expanded to provide retirement benefits to the entire government sector. Post-independence, Provident funds were set up to extend coverage among the private sector’s employees. While the government runs schemes like Public Provident Fund and the New Pension Scheme, which form the bulk of the funds in India, private insurance players have also introduced scheme that offer similar if not better returns than the government run schemes.

The main reasons that an individual should buy a pension plan are:

1) To maintain your financial independence:

Life expectancy in India has risen in the last five decades, breakthroughs in medical technology and science have ensured that we live longer. While the time that we work and earn an income is almost fixed, hence it is imperative to plan for a future so that you do not have to depend on anyone in your later years. The rise of nuclear families has also contributed to the growth in sale of plans.

2) Maintaining your lifestyle

While working and earning an income during your productive years, you get used a particular lifestyle. With proper planning and the right investments, you can ensure that you enjoy the same lifestyle that you are used to, even after you have stopped working.

3) Ensure your family is not dependent on anyone.

In today’s uncertain times with double income families, EMIs and a host of other financial commitments, you should be concerned and prepared to secure your family’s financial stability in your absence. A good plan will ensure that your family will remain financially independent.

Types of Pension Plans –

1) Life Annuities guarantee you a specified amount of income for life. After death, the amount invested is refunded to your nominee. These are the simplest and most common form of plans sold in India. Typically premiums are based on your age at the time of entry to the scheme.

2) Guaranteed Period Annuities provide a specified income for your lifetime and guarantee that your nominee will receive payments for a certain minimum number of years, even if you should pass away earlier. In case you live longer than the specified minimum number of years, you are entitled to receive annuity payments for your lifetime.

3) Certain Annuities: Under this kind of scheme, the stipulated annuity is paid for a fixed number of years. The annuity payments stop at the end of that period, irrespective of how much longer you live.

4) Deferred Annuities: The premiums paid into deferred annuity plan can be deducted from taxable income. The interest earned on the annuities is not taxed immediately but the proceeds of the annuity will be taxable when a payout.

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