What Should You Consider Before Buying A Pension Plan?
Select your pension plan judiciously based on your requirements; for instance, if you club it with life insurance, the insurance coverage may not be as robust as term plans
Pension is a crucial part of retirement planning. You must plan for monthly income or cash flow after retirement for financial security in old age. Pension plans with guaranteed regular income could be a good option in this context. In pension plans, the subscriber contributes a fixed amount regularly to build a corpus fund. After retirement, they get a fixed monthly or yearly sum based on the selected scheme and the invested amount.
Pension plans include government-sponsored schemes such as the National Pension System (NPS), Atal Pension Yojana (APY), etc., and plans provided by insurance companies.
These schemes are open to all, and you can explore plans based on your requirements.
Regarding pension plans, Rahul Jain, president and head of Nuvama Wealth, says, “The individual has to work out the size of the required corpus and put in place an investment plan. It can be daunting for many, which is where pension plans come in handy. These plans offer regular cash flow, known as an annuity, which starts after the premium payment term is over.”
In the case of NPS, 40 per cent of the corpus must be invested in an annuity plan. However, there are different annuity options available covering self, spouse, parents, and children, with provisions for nominees to receive pensions after the subscriber’s death. In NPS Tier I accounts, there is a tax benefit under the old tax regime, but there is no guarantee of the corpus amount.
Private insurance companies also offer various types of pension plans, such as immediate annuity, deferred annuity, life annuity, annuity for a specific period, pension plan with insurance cover, joint life annuity, etc., so select the one that suits you best.
Here are some factors you should consider while buying a pension plan.
Understand Your Requirement: A pension plan aims to offer financial security after retirement. So, select a plan that meets your requirements, like regular cash flow or insurance coverage for you and your spouse, etc.
If the spouse is financially dependent, you may consider a joint life annuity plan, in which the spouse will continue receiving money after your death. Jain says, “Joint life annuity plans cover two lives, usually the policyholder and their spouse. The annuity is paid as long as either of the two lives survives. It provides financial support to the surviving spouse after the demise of the primary policyholder. This option is offered only by a few insurance companies.”
One may also choose an annuity with a return of purchase price (ROP), where if the policyholder dies during the annuity payout period, the premium amount or a portion of it is returned to the nominee, says Jain.
Flexibility: Payment and withdrawal flexibility are a great relief for those who do not have a regular income. In that case, one may check the payment and withdrawal options in the pension plan. For example, one can make regular or single payments for a deferred annuity, but a lump sum premium payment is required for an immediate annuity. While purchasing a plan, the individual must check whether there is an option to make an extra contribution when there is surplus money or a pension payout option to meet fund requirements at unexpected times. It is helpful if a plan offers some flexibility in the long term.
Annuity Rate Or Return: As pension plans in India are for securing the future, they typically offer guaranteed income. One may compare the returns different pension plan providers provide and choose the best offer. Moreover, based on this, one may work out the monthly income from the estimated retirement corpus or increase the contribution to build a decent corpus for retirement years. If the pension plan offers different investment options like guaranteed or aggressive investment schemes, decide as per the risk appetite to optimise the returns.
Vesting Age: Vesting age is when one starts getting a pension. If a plan offers a pension after 60, and the individual wants to retire at 58, the investment would be locked for two years. So, according to one’s retirement plan and age, select a policy offering a matching vesting age.
However, Jain says that a person can take more than one pension plan.
Other Benefits: One may also check additional benefits offered by different companies, such as bonuses, incentives, etc., that can overall increase the corpus size. Pension plans are structured products to take care of cash flow needs in retirement. However, pension plans have their share of demerits you should be aware of.
Lower Returns: Traditional pensions, which invest in guaranteed income instruments, may not be a good option if inflation rises more than the return offered by the plan. The returns would erode due to inflation. It is the biggest drawback of a guaranteed pension plan.
Tax Liability: The annuity from the accumulated corpus is taxable. Further, if one chooses the new tax regime, there will be no income tax benefit under Section 80C, even at the time of investment. The 40 per cent mandatory annuity in NPS is also taxable as per the subscriber’s slab rate.
Insurance Cover: Pension plans are mainly to ensure a cash flow, but if one takes death benefit (life insurance) with it, it is not of much use as the insurance cover is not as robust as term plans.
Jain says, “Unlike other insurance plans, the primary purpose of a pension plan is to offer regular cash flow as per the desired frequency. A term plan is appropriate if an individual is looking for a life cover”.
So, keeping these points in mind, choose an appropriate pension plan to secure your old age financially.
Here’s how a high CIBIL score can help you obtain loan effortlessly, premium perks, and the freedom to pursue dreams
Non-resident Indians often plan to come back to spend their retired life with their close relatives and friends in India. But before they decide to return, they must give special attention to their financial preparation so that they can comfortably adjust to their new life in India
Elderly parents can avail of legal provisions under the Maintenance and Welfare of Parents and Senior Citizens Act, 2007, to protect them from situations like property grabbing and abandonment by children
Get all the latest stories delivered to your inbox
Get all the latest stories delivered to your inbox