When you start surfing the net for retirement Planning in India, a hell lot of pension plans, annuity plans pages open in front of you. A variety of pension plans, guaranteed pension plans start appearing. Since there are a whole lot of variety of plans available, many a times it become difficult to choose the Best Retirement Pension Plan in India.
Table of Contents
What is pension plan?
Pension plans are are a kind of investment plan which help you to accumulate some part of your savings for long term period, so that you can have a secured financial future. The pension plans offer the dual benefit of a life cover along with saving money saving element.
Usually all Pension plan provide a guaranteed pension for a fixed tenure or for entire life( The pension payment duration depends on the option chosen by you).
Here you choose to pay a fixed sum for fixed number of years. Thus you accumulate certain corpus at the end of premium paying term. This accumulated corpus is given back to you in installments ( may be yearly, monthly or any other mode).
Types Pension plans in India
Deferred Annuity
The deferred annuity plan are the plans in which you choose to defer ( only contribute and promise to take pension after fixed number of years) the pension or annuity payments for few years and choose to pay in one installment or in multiple installments.
Here you pay for 10,15, 20 years 30 years ( or any other duration) and after completion of this period you start taking pension from this plan.
Benefit of deferred annuity plan
- You get tax deduction under section 80C on your premium payment up to 1.5 lakh.
- Pay a periodic amount or a lumpsum amount and after few years you start getting pension from your corpus.
- Few plans offer life cover too.
Drawbacks of Deferred Annuity Plans
- The pension amount is fully taxable in your hand. The pension amount is taxable under the head, income from other sources.
- If you choose to close the policy and withdraw entire amount then two third amount is taxable.
- There is no option to withdraw entire amount during the entire duration and thus liquidity is a big problem with these kind of the plans.
Immediate annuity –
In immediate annuity plans, you pay a lump sum amount and start getting pension on immediate basis. For instance, you deposit a lump sum amount and you will start getting the pension from the next month, next year, next quarter, or after completion of 6 months. You can choose Pension payment mode.
Read more : https://bestinvestindia.com/lic-saral-pension-yojana-2021-details/
https://bestinvestindia.com/how-to-open-pmvvy-scheme-online/
https://bestinvestindia.com/pmvvy-vs-senior-citizen-saving-scheme/
There are multiple payout options available in these plans. Your pension amount depends on the payout option you have chosen. To understand your payout options please watch the video.
The pension amount depends on the amount you paid and the option you have chosen for pension. Additionally yearly payout is bit higher than monthly or other mode payouts.
The advantages and disadvantages of immediate annuity plans are almost same as of deferred annuity plans.
Here also, you get tax exemption of Rs 1.5 lakh and income is taxable under the head income from other sources.
The biggest drawback of these plans is liquidity. You cannot withdraw your money in between of the policy except in special cases such as terminal illness of a family member.
In case of unfortunate death of the subscriber, the payment amount is returned back to the nominee.
Annuity certain
In annuity certain option, Pension payment is given for a certain period irrespective of the subscriber is alive or not.
For example,
Mr. A choose annuity Certain for 10 years. Than he will get annuity payments for full 10 years and thereafter also.
In case Mr. A dies after 5 year, even than the annuity will be paid for 10 years and thereafter annuity payment will be stopped.
With cover or without cover pension plans
As the name suggests, with cover plans offer a life insurance coverage along with the Pension payment. These deferred annuity plans provide life insurance cover.
Although life cover amount is not very high because the higher amount of the premium is used towards the growth of the money.
In case of unfortunate death of the subscriber the life cover is given to the nominee.
While in case of without cover pension plans, the fund value is given to the nominee.
Guaranteed Period Annuity
In guaranteed period annuity plans, the the pension is paid for the guaranteed period say, for 10/ 20 /30 or more number of years, irrespective of the subscriber is is alive or not
Life Annuity
In life annuity pension plans, you get pension all your life. The pension payment is stopped after you.
Read more about pension plan https://bestinvestindia.com/retirement-planning-steps/
National Pension Scheme
NPS (National Pension Scheme) is a Government of India Retirement Scheme launched in 2009.
NPS is a retirement scheme therefore you have to contribute in NPS till your retirement age i.e. till the age of 60. Thereafter you get pension for all your life.
The amount of pension depends on the amount you utilize for annuity purpose and annuity option you choose while selecting annuity.
Who Can Invest in NPS
Any Indian resident or NRI/OCI between age 18 years but below 70 (earlier it was 65), can invest in NPS. The account will be closed if citizenship status of NRI changes from NRI to foreigner.
How to invest in NPS
There are two ways by which you can register and invest in NPS
- Physical or Offline mode-
To open NPS account you have to deposit your documents with POP-SP (point of presence service provider).There is whole list of POP- SP which includes Bank, post office and other non financial institution.
Benefits of National Pension Scheme:
You can‘t withdraw your money therefore you are forced to save your money till retirement.
You do not have to judge much as only few players’ i.e. fund managers are available.
Even risk averse investor invest in NPS so may get better returns than traditional life insurance and other traditional investment options.
Drawbacks of National Pension Scheme:
Liquidity is the biggest issue with this plan. You can’t withdraw before your retirement on your wish. There should be a specified reason to withdraw money partially (cannot withdraw entire amount) from your NPS account.
Read more about NPS https://bestinvestindia.com/nps/
Pension( Retirement) Fund
Various mutual fund houses offer retirement solution pension funds. These funds invest your money in a predefined Pension Fund.
There are some restrictions on withdrawal of the fund. These Pension funds offer a better return as compared to traditional annuity/ pension plans but returns are subject to market risk.
Benefits of Retirement Plans:
You are forced to save for your retirement and most importantly you cannot withdraw your money before your retirement. Often liquidity is offered with high exit load.
Drawbacks of Retirement Plans:
Liquidity is a problem from the fund. If you require money than it become difficult to withdraw money. Furthermore high exit load makes it less favorable.
Whole Life ULIPs
Under this o pension plan, the money stays invested for the whole life of the insured and upon retirement, he/she can make partial withdrawals and get tax free income. Additional withdrawals are allowed whenever needed or whenever necessary.
Public Provident Fund :
PPF account is used extensively for saving tax in India. A large number of people invest in PPF keeping in mind their retirement. It is a very good investment avenue for risk averse investors who want steady and safe returns.
Benefits of PPF Account:
- Investor will stick to long term and have safe returns in hand.
- You can save tax along with investment of money.
- PPF Offers EEE taxation which means principal amount, interest and maturity amount are tax free.
- PPF account can be extended for block of 5 years therefore it can be maintained till and after retirement also.
- The best part is tax free maturity which makes it lucrative as compared to traditional pension plans where return is less and maturity is taxable.
Drawbacks of PPF
- PPF offers low inflation adjusted returns.
- Liquidity is a big issue with PPF account. You are allowed to withdraw partially under strict conditions.
- Interest rate keep on changing and this makes it difficult to predict future amount and pension also.
National Saving Certificate
Few people use NSC for their retirement pension. They keep on buying NSC each month for their entire life and keep on reinvesting till maturity. Thus they create retirement income from this.
Benefits of NSC:
NSC offers peace of mind to risk averse investor.
Drawbacks of NSC
- NSC also offers low inflation adjusted returns.
- Liquidity is a big issue with NSC. You are not allowed to withdraw partially .
- Interest rate keep on changing and this makes it difficult to predict future amount and pension also.
- Most importantly interest is taxable and to make interest tax free, you have to show it in your income and claim deduction under section 80C.
Conclusion:
If you wish to get good returns then there is nothing better than mutual funds and this is because of their flexibility, customizable plans, liquidity and high returns. Pension plans offered from life insurance companies have high in built charges and low returns.
Furthermore taxation of pension plan makes it even more costly.
NPS is a good pension product but liquidity is a big constraint for investor. PPF and NSC’s are good for risk averse investor.
Additional resources
https://bestinvestindia.com/retirement-planning-steps/
https://bestinvestindia.com/how-to-plan-for-retirement-in-india/
How Mutual Fund SWP Works – What is SWP
