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Features & Benefits of Pension Plans in India

One of the best ways to start planning your retirement is by investing in a feature-packed pension plan. Here are five benefits that make pension plans a must for every individual.

  • 3,090 Views | Updated on: Jun 13, 2024

Retirement planning is necessary to ensure that you enjoy your post-retirement life just as you have imagined. With the rising medical costs and inflation, the sooner you start planning your retirement, the more secure your sunset years can be.

What are Pension Plans?

Pension plans are long-term financial products designed to help individuals secure their financial well-being during their golden years. These plans are typically offered by employers or financial institutions and are voluntary in nature, although some employers may make them mandatory for their employees.

The fundamental principle behind a pension plan is to build a retirement corpus by contributing regular payments or premiums over the years, often with the added benefit of potential tax advantages. Upon reaching retirement age, the plan holder can begin to receive regular pension payments or withdraw a lump sum amount from the accumulated corpus, depending on the type of pension plan chosen.

Features of Pension Plans

Pension plans, also known as retirement plans, offer a structured and disciplined approach to saving and investing, ensuring a comfortable and worry-free retirement. Let us now delve into the key features of pension plans and their importance in today’s ever-changing financial landscape.

Contribution Options

Pension plans offer flexible contribution options, allowing plan holders to make regular contributions over time or contribute a lump sum amount at the outset. The regular payment method is preferred by many as it allows for disciplined savings and is often automatically deducted from an individual’s salary, making it less burdensome.

Vesting Period

Pension plans typically have a vesting period, which is the duration after which the plan holder becomes eligible to receive the benefits. This ensures that the funds remain intact for retirement purposes and discourages premature withdrawals.

Tax Benefits

One of the most attractive features of pension plans is the potential tax benefits they offer. Many countries provide tax deductions on the contributions made towards pension plans, encouraging individuals to save more for retirement while reducing their taxable income in the present.

Investment Options

Depending on the type of pension plan, plan holders may have the freedom to choose from various investment options. These options may include equities, bonds, mutual funds, or a combination thereof. The flexibility to choose investments enables individuals to tailor their pension plans according to their risk appetite and financial goals.

Regular Income

Upon retirement, pension plans provide a steady and reliable source of income. This is especially important as retirees no longer receive a regular salary from their employment and need a consistent income stream to cover living expenses and maintain their lifestyle.

Survivor Benefits

In some cases, pension plans may include survivor benefits, ensuring that the spouse or dependents of the policyholder continue to receive financial support even after their demise. This feature provides added security to the policyholder’s family.

Portability and Flexibility

Pension plans are often portable, allowing policyholders to transfer their plans to a new employer or financial institution without losing the accumulated benefits. Additionally, some plans offer flexible options for partial withdrawals or additional contributions to accommodate changing financial circumstances.

Benefits of Investing in Pension Plans

One of the best ways to start planning your retirement is by investing in a feature-packed pension plan. These plans help you accumulate and invest a fixed portion of your savings during your pre-retirement years for a financially secure future.

Here are five benefits that make pension plans a must for every individual concerned about retirement-

Disciplined Saving for Steady Future Income

While most people want to save and invest regularly, not many can maintain the level of discipline needed for such long-term financial commitments. A pension plan inculcates the habit of saving before spending so that you can stick to your long-term saving plan with utmost discipline.

After reaching your retirement age, the savings will be repaid to you in the form of a regular income, along with additional benefits. This makes these pension plans a practical way to secure your retirement life financially

Smoother Transition to Retirement Life

After working for 30-35 years, switching to a life where you don’t work anymore could be challenging. One of the biggest concerns during this transition is your financial stability. Having a pension plan that you have dedicatedly invested in over the years could help make this transition smoother.

It will eliminate the need to rely on your family members for financial support or liquidate your assets to manage basic and age-related expenses. 

Range of Add-Ons To Choose From

While the primary objective of a pension or retirement plan is to provide policyholders with a steady source of income in the later years of life, some insurers also offer a wide range of add-ons. For instance, a pension plan could be purchased along with a life cover. With this plan, the policy nominee will receive a lump sum amount after the policyholder’s demise.

There are other add-ons, such as permanent disability rider and accidental death rider, for enhanced security. 

Tax-Efficient Retirement Planning

Pension plans are also highly tax efficient. With retirement plans, you get to choose from immediate annuities and deferred annuities. You invest a lump sum amount in immediate annuity plans and start receiving a pension or annuity almost immediately after investing. While the interest you earn from an immediate annuity plan is taxed like any ordinary income, the principal is tax-exempt. 

In deferred annuity plans, there are two stages- accumulation and income. During the accumulation stage, the policyholders pay premiums at regular intervals. In the income phase, they can withdraw a specific portion of the saved money while the rest is invested to generate a steady source of income. The income grows without any tax deductions during the accumulation period. 

Lower Premiums for Younger Policyholders

Like health insurance and life insurance products, the premium in pension plans increases with age. By purchasing a retirement plan when you are in your 20s or 30s, you can take a step towards securing your retirement living at a lower cost compared to buying the plan in your 40s. 

Moreover, most insurers also let you choose assets in which your premiums would be invested. When you start early, you can choose more aggressive assets that often generate higher returns

Build the Retirement of Your Dreams with the Ideal Retirement Pension Plan

A pension plan is a product that has been created with the sole goal of providing financial security in the later stages of life. Many insurers also offer additional benefits, like guaranteed additions, annual bonuses, add-ons, and more, to help you secure your financial future and build the retirement of your dreams. 

Get in touch with a reputed insurer to know more about these benefits and understand how they can help supplement your retirement planning. 

FAQs

1

What are the factors to consider before choosing the best retirement plan?

Choosing the best retirement plan requires careful consideration of various factors to ensure that it aligns with your financial goals and provides a comfortable retirement. Some essential factors to consider are:

  • Retirement Goals
  • Risk Tolerance
  • Investment Options
  • Fees and Charges
  • Tax Implications
  • Flexibility
  • Employer Benefits

2

How does a pension plan work in India?

A pension plan in India is a financial product designed to provide a regular income during an individual’s retirement years. It works through a process of contributions, accumulation, and eventual payouts. Here’s how it generally works:

3

What are some Central government-backed pension plans in India?

The Central Government of India has introduced several pension plans to provide financial security and stability to citizens during their retirement years. Some popular central government-backed pension plans in India include:

  • Atal Pension Yojana (APY)
  • Employees’ Provident Fund (EPF)
  • Public Provident Fund (PPF)Contributions
  • Accumulation Phase
  • Vesting Age
  • Payouts
  • Annuity Options
  • Taxation
  • National Pension System (NPS)
  • Pradhan Mantri Vaya Vandana Yojana (PMVVY)

Key takeaways

  • A pension plan inculcates the habit of saving before spending so that you can stick to your long-term saving plan with utmost discipline.
  • Having a pension plan that you have dedicatedly invested in over the years could help make this transition smoother.
  • Some insurers also offer a wide range of add-ons in the pension and retirement plans.
  • Pension plans are also highly tax efficient. With retirement plans, you get to choose from immediate annuities and deferred annuities.
  • A pension plan is a product that has been created with the sole goal of providing financial security in the later stages of life.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors