What is a Pension Plan?
Pension plans, or popularly known as retirement plans, allow individuals to transfer a part of their income towards creating a retirement corpus. The benefit payable is made in a lump sum or at regular intervals, as per the needs of the investor. These plans come with additional benefits in the form of tax deductions on income under Sections 80CCC, 80CCD(1), and 80CCD(1B).
How do Pension Plans Work?
Let's assume that you are a 32-year-old healthy person who is earning Rs. 50,000 per month. If the expected lifespan is around 80 years and you are looking forward to retiring at 60 years, then how much should you invest monthly for your retirement to get a monthly income of Rs. 50,000 during the post-retirement period?
Let's consider the inflation rate at 6%. You have to build a corpus of Rs 7.15 crore to get Rs.50,000 as a monthly income after retirement. If you plan to buy a ULIP and the returns until the age of 60 are 12% and 5% (after retirement), you have to invest around Rs. 26,000 monthly to reach the desired target.
If you start investing at 30, the monthly investments will be around Rs.20,000. This is the advantage of investing in a pension plan at an early age.
If you are not good at manual calculation, then you can take the help of a Pension Calculator.
Importance of Pension Plans
While we cannot stress enough on the importance of investing in a pension plan, the decision to buy is entirely up to you. However, if you are looking for good reasons, we have several.
- The accumulated corpus can serve as income replacement post-retirement.
- It acts as a savings account that helps you cope with future uncertainties.
- Pensions post-retirement can help cover medical expenses as a result of infirmities during old age.
- The corpus can be used to fund child education, cover outstanding debts.
- Funds can be used to travel the world and explore interests that you never had the time for.
- It eliminates the need to depend on anybody for support.
- Buyers can also invest the sum assured to start their own ventures that they had always dreamt of as a young adult.
Benefits of buying Pension Plans
Investment in pension plans guarantees a steady flow of income after retirement. However, the income will depend on your investment.
Pension plans come with significant tax respite under Chapter VI-A of Sections 80C, 80CCC, and 80CCD as per Income Tax Act, 1961.
Long Term Savings
A retirement or pension plan is a long-term savings scheme. It helps you with an annuity that you can invest further to generate a steady flow of income.
Savings For Medical Emergencies
A medical emergency post-retirement can create a big hole in your pockets. Having an adequate pension plan can help you in dealing with such unwanted expenses easily.
Most of the insurance companies offer insurance cover along with basic retirement plans. This ensures that the family does not have to suffer in case of the unfortunate demise of the insured.
Pension plans are primarily savings plans, therefore, there are no risks involved.
Lower Premiums if you buy Young
Premiums charged by insurance companies are significantly lower for young policyholders. As you start aging, the premiums tend to increase as well.
Best Pension Plans in India
Our team at PolicyX.com attempted to identify the best pension plans available to the citizens of India based on certain elements. The table below highlights these plans.
| || LIC New Jeevan Shanti|| HDFCLife Click 2 Retire|| SBI Life Saral Pension|| ICICIPru Easy Retirement|| Max Life Guaranteed Lifetime Income|
| Entry Age|| 30-79 years|| 18-65 years|| 18-65 years|| 18-70 years|| Immediate Annuity: 0-80|
Deferred Annuity: 45-80 years
| Maturity Age|| 31-80 years|| 45-75 years|| 40-70 years|| 30-80 years|| 46-90 years|
| Death Benefit|| 105% of purchase price|| 105% of premiums paid|| 105% of premiums paid|| 105% of premiums paid|| 105% of purchase price|
| Key Features|| Single & Joint Life Deferred Annuity|| Assured vesting benefit|| Life cover with SBI Life - Preferred Term Rider|| Guaranteed vesting benefit|| Immediate /|
| Accrued additional benefits|| Market-linked returns|| Guaranteed Additions for first 5 years|| Unit-linked returns on equity and debt funds|| Regular income payouts|
| Rebates up to 2% for online purchase|| Zero premium Allocation Charge|| Vested Simple Reversionary bonus + Terminal bonus|| Guaranteed pension booster|| Single Life / Joint Life Annuity|
**Last Updated on June, 2021
* Key features are subject to changes as per chosen plan options
Types of Pension Plans in India
In India, there are several forms of pension plans such as deferred annuity, life annuity, immediate annuity, etc. However, Deferred Annuity and Immediate Annuity were found to be the most common plans that people opt for.
Let's take a look at the types of pension plans in detail.
| Deferred Annuity|| A deferred pension scheme allows you to accumulate a corpus through normal charges or a single premium over a policy term.|
The pension starts once the coverage term is over.
The advantages of deferred pension plans are huge and include tax benefits, which can be associated with this pension scheme.
The plan suits all sorts of buyers - individuals who need to make investments systematically and people who have a bit of cash to make investments.
| Immediate Annuity|| Under an immediate annuity scheme, pension starts right away. One has to deposit a lump sum quantity and the pension will begin immediately.|
After the loss of life of the concerned person, his/her nominee is entitled to get the money.
You could choose your annuity from distinctive annuity payout options. Moreover, you may enjoy tax benefits on the premiums paid as per Indian tax laws.
| Annuity Certain|| An annuity is paid to the annuitant for the specific tenure.|
The annuitant can choose the tenure period and if (s)he dies earlier than the payment term ends, the money will be paid to the beneficiary.
| Guaranteed Annuity|| As in line with this annuity choice, the annuity is given for regular intervals like 5, 10, 15, or 20 years, whether or not the person survives that tenure.|
| Life Annuity|| As consistent with this annuity alternative, the pension amount can be paid to the annuitant till demise. If the annuitant chooses the "with partner" alternative, then after the demise of the annuitant, the pension can be paid to the partner/spouse.|
| National Pension Scheme (NPS)|| The National Pension scheme has been developed by the government for people looking to build up pension amounts. NPS is transparent and cost-effective, wherein the pension contributions are invested in the pension fund schemes. |
You may withdraw 60% of quantity at retirement and relaxation of 40% must be used to buy an annuity.
| Pension Funds|| Pension funds are an awesome way to build up a corpus amount. These are a form of long-term investments and as a result, tend to pay better. Pension Fund Regulatory and Development Authority (PFRDA) has allowed 6 corporations as fund managers.|
**Last Updated on June, 2021
Key Features of Pension Plans
One of the key features of a pension plan, annuities are payable by insurance companies either immediately or through a deferred pension scheme.
| Immediate Annuity|| Deferred Annuity|
| The amount is paid by the insurer as soon as it receives the premium|
Option to pay the premium in a lump sum or at regular intervals
| Percentage of the amount is paid after a period of time, chosen by the policyholder|
Option to pay the premium in a lump sum or at regular intervals
**Last Updated on June, 2021
The premium payment terms can vary according to the plans chosen. Different insurers tend to set different criteria; for instance, some plans offer a single premium payment option while other plans allow premiums to be paid at regular intervals.
Insurance companies usually set their own standards pertaining to a minimum and maximum sum assured. Pension plans pay out the sum assured as maturity or death benefit. The amount is paid at regular intervals as per the wishes of the insured.
It is the age when policyholders begin to receive their monthly pension. While most insurers set the maximum vesting age at 70, there are some insurers that extend it to 90 years.
Investors are offered the liberty to choose the tenure of premium payment. It is defined as the time period from when you start investing till the time you stop. The accumulated premium serves as a cushion to cover your expenses post-retirement.
Pension Plan Riders
Accidental Death Benefit Rider
The policyholder receives an additional sum assured in the event of death in an accident or as a result of one.
Dismemberment Benefit Rider
In the event of an unfortunate incident leading to dismemberment/disability, the insurance policy provider is liable to pay compensation to the policyholder if the rider is availed.
Critical Illness Rider
If the rider is availed, the policyholder is entitled to receive financial assistance if (s)he is diagnosed with any of the pre-specified critical illnesses.
Term rider essentially converts a pension plan into a regular life insurance plan in case the insured passes away during the policy period. In the event of death of the life insured, the nominee receives a death benefit.
Waiver of Premium
This rider waives off future premiums payable in the event of an illness or an accident leading to disability that eventually results in loss of income.
When Should You Start Retirement Planning?
The simple answer is as soon as possible. Ideally, you should start saving for your retirement in your 20s, when you start earning your pay cheques. That's because the sooner you begin saving, the more time you will get to collect adequate funds.
Let's understand the same with an example. You start investing at the age of 25 and keep aside Rs.3000/year to invest in a tax-deferred retirement account. By the time you reach 65, your Rs.3000 investment will grow at least Rs.3,38,000 (assuming a 7% annual return).
Factors to Consider before Investing in a Pension Plan
When it comes to retirement planning, it is advisable to keep your monthly expenses in mind. Given that your regular income is cut off, you need to carefully estimate the kind of expenses you might have post-retirement. And then, choose a plan that allows you to maintain an adequate income.
Don't forget the growing inflation rate and plan accordingly. Keep an eye on it to maintain sufficient funds for a secured lifestyle after retirement.
Before zeroing on a pension plan, do your research properly. Know what you are signing up for. Check the reviews of various plans offered by insurers along with their reputation.
Check the fees and deductions that may be applicable to the surrendering system. Basically, it's chargeable when you surrender the plan before the maturity time (in case of emergencies).
Deciding the Right Coverage
Buying a pension plan is essentially ensuring that there is a financial net for the dependents and for yourself to fall back on in the future. Based on the factors that we discussed above, you should be in a good position to calculate the financial benefit you and your family will need to meet your goals post-retirement.
Now determine the financial cover you would require to protect your future. Consider the following aspects:
- Add up all the current and planned obligations such as mortgages, funds for child education, outstanding debts, income replacement, etc.
- From the sum, subtract your existing assets like savings, other insurance plans, returns on investments made, etc.
The resulting amount is a fair estimation of the cover you would need.
You can assess the amount that you will need on a monthly basis post-retirement by consulting an expert. Alternatively, you could take advantage of online comparison portals and free consultations, offered by PolicyX.com.
How To Buy Pension Plans?
You can log on to PolicyX.Com to buy a pension plan. Below are the steps-
- Find 'Free Quotes From Top Companies' given at the top-right corner of this page.
- Provide basic details such as DOB, annual income, gender, etc.
- Click on the tab 'Continue'.
- Provide your phone number, name, and city.
- Click on the tab 'Proceed'.
- Check the available quotes from the top insurance companies in India.
- Choose the desired plan and tap on ''Invest' at the right corner of the chosen plan.
- Click on the tab 'Proceed to Buy'.
- Enter your 'Email id' and click on the tab 'Submit'.
- It will take you to the company's official website.
- Make the payment using available payment options.
- You will receive a confirmation along with the policy documents at your registered email address.
Claims Process for Pension Plans
Insurance companies are continuously striving to make their claims process shorter and easier. If the claimant ensures that all the criteria are met as per company regulations, filing a claim and getting the sum assured should not be a big hassle. Read ahead to find how a nominee can file a claim in India under the following scenarios:
- Policyholder is required to appoint three nominees
- The nominee should approach the PoP* responsible for the NPS account
- The nominee is required to submit important documents**
- The documents are then processed and verified by the PoP
- Verified information is sent to the Central Recordkeeping Agency
- At this point, the requests are executed.
*PoP stands for Point of Presence
**Original Permanent Retirement Account Number (PRAN) card, legal heir certificate, cancelled cheque, and claim form
For all other forms of pensions
In case of Insured's Death
Nominee of the deceased should:
Inform the insurer about the death with details on time, place, and cause of death.
- Submit needful documents* and proof to the insurance company.
- If the policy was assigned, the assignee will have to provide the documents.
- If not, claimant has to submit legal proof of his/her relation with the insured.
- Cases involving police inquiries will require an investigation/survey report to be submitted.
- Once the investigation is over, the insurance company approves/disapproves the claim
*Death certificate of the insured, claim form, post-mortem, hospital, and attending doctor's reports
In case of Plan Maturity
If the insured has duly paid all the premiums:
Upon nearing maturity, the insurance provider will send an intimation to the policyholder.
- A discharge voucher is sent at least 2-3 months before the date of maturity.
- The policyholder has to sign the voucher and send it back.
- Original policy bond also has to be sent to the provider.
- If the policy is assigned to an individual entity, the amount is paid to the assignee.
- The assignee signs and sends back the discharge voucher.
Documents Required To Buy Pension Plans
Birth Certificate, 10th or 12th mark sheet, Driving License, Passport, or Voter ID.
Driving License, Passport, Voter ID, PAN Card, or Aadhar Card, which proves one's citizenship.
Electricity Bill, Telephone Bill, Ration Card, Driving License, or Passport should mention the permanent address.
Salary slip, Form 16, or Employer's certificate.
Duly filled in the proposal form is required
Some companies may require medical check-up to make sure that the insured does not suffer from any chronic illness.