Terminologies You Should Understand About Retirement Plans

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Terminologies You Should Understand About Retirement Plans

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  • 15th Feb 2022
  • 342

Terminologies You Should Understand About Retirement Plans

Retirement planning should be one of the most important parts of your financial goals to lead a safe and sturdy life with your loved ones in the future. You do not want to end up in a situation wherein you are having to look for options to fund your emergency requirements and needs. However, many of you do not know where to begin, and so, unfamiliar banking terminologies can seem a little intimidating. Therefore, to help you out, here is a list of retirement planning terms to build some confidence and help you get started.

Employee Provident Fund

The Employees’ Provident Funds and Miscellaneous Act, 1952, governs the primary system and functioning of the Employee Provident Fund, also commonly known as EPF. In this, both the employee and the employer contribute 12% of the employee’s base salary and dearness allowance to the fund. The current interest rate on EPF stands at 8.50% per annum.

Annuity Plans

An annuity plan is an agreement you enter into with a financial services company or an insurance company. The firm offers to give future income (typically with some earned interest amount) for a fixed number of years or for your entire life. Annuity plans are a great option for people who want to enjoy a consistent level of income when they no longer work. Fixed, variable, instant, and index annuities are some common examples of annuity plans. It is advisable to consult a financial advisor before making any decisions.

Defined Contribution Schemes

Defined contribution schemes are the ones where you invest a specific amount and the pension is calculated based on the fund returns and the amount you contribute. Products like EPF and National Pension Scheme (NPS) fall under this category. In NPS, you can invest till 60 years of age. There are various other variations available in NPS where you can go in detail but we would talk more about it in some other article.

Glossary on terminologies you should know and understand about retirement plans and pension schemes

Defined Benefit Schemes

Defined benefit plans are becoming increasingly rare as a consequence of the rising costs and the degree of risk employers assume when financing and monitoring investments. However, they are very common, sponsored by employers, and ensure guaranteed monthly payments to employees. There was a time when a share of your EPF was transferred to Employee Pension Scheme. It had a set formula and everything, but since September 1, 2014, EPS was discontinued for employees earning more than ₹15,000 a month.

Individual Retirement Account (IRA)

An IRA is a retirement-savings investment account wherein the IRS has imposed an annual contribution limit. These accounts take tax exemptions into consideration which means that they offer tax advantages based on the sort of IRA you pick. You can start drawing money from your IRA once you reach the age of 59 and a half. You will be risking additional tax penalties if you withdraw the money prior to this age.

Traditional IRA

Traditional IRAs are tax-deferred retirement plans, which implies that you contribute pre-tax earnings and don’t pay taxes on the money until it’s distributed. At the time of withdrawal, you are charged at your current marginal tax rate. Annual contribution restrictions apply to traditional IRAs, and you must start taking required minimum payments (RMDs) by the age of 72. The traditional account is also a type of IRA.

Now that you have some knowledge of what falls under retirement planning, you can go ahead and start your very own journey to lead a fulfilling life!

- A Consumer Education Initiative series by Kotak Life

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