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Types of Retirement Plans

To prepare for retirement, it is suggested that you start planning early and invest in post-retirement plans. Here are 5 types of retirement plans you can consider for retirement planning.

  • 9,552 Views | Updated on: Jun 14, 2024

To prepare for retirement, one should start planning early and invest in post-retirement plans, tools of investment that help create a retirement fund and give returns in the form of regular income once you retire. Let’s understand the different types of retirement plans that come into play.

You work hard every day to live your life in luxury, but with the current plans and lifestyle choices you make, you should also consider how you can enjoy your life when you no longer have a disposable income to enjoy your retirement. Typically, the retirement age is 60 years; however, you can or may want to take voluntary retirement whenever you wish to.

Every individual has different expectations and financial goals for their retirement. To cater to the needs of different individuals and their retirement goals, the financial market offers a variety of investment options for retirement.

Post Retirement Plans: A Boon for After-work Life!

The importance of after-retirement plans cannot be emphasized enough. You must reap and enjoy maximum retirement benefits, and to do so, you must invest in a retirement plan. There are different types of retirement plans, each with its features and benefits. Not just this, but retirement plan also come with various tax benefits. Thus, creating a corpus will help you support yourself and your loved ones from the regular income that you will get from these plans.

Types of retirement plans

Types of Retirement Plans

Retirement plans offer a means to save and invest money for the future, ensuring a comfortable and financially secure post-work life. However, with an array of retirement plans available, it can be overwhelming to choose the one that best suits individual needs. The types of retirement plans are as follows:

Insurance-Based Plans

Insurance-based plans are post-retirement plans bought directly from the insurance company. They are also known as personal pension plans since there is no involvement of an employer or a government body in purchasing the plan. Such plans have both death benefits and retirement benefits.

Insurance-based after-retirement plans can be categorized as deferred annuity plans, immediate annuity plans, pension plans with cover, and pension plans without cover.

a) Deferred Annuity Plan

These retirement plans help create a retirement fund by investing a lump sum or a premium you can only access after a certain period specified in the plan. In addition, such plans further invest your money in low-risk debt plans or equities; the choice lies with you.

b) Immediate Annuity Plans

Under this plan, you invest a lump sum, which you can withdraw at any time and do not have to wait. If you have a big sum lying with you, such a plan is for you.

c) Pension Plans with or Without Cover

These are relatively simpler plans. As the name suggests, the former comes with a life insurance cover and the latter without a life cover.

Employment-Based Retirement Plan

If you work as an employee in some company, your employer will set up a retirement plan. Under such after-retirement plans or employee pension schemes, an amount is deposited from both ends - a share of your salary and the remaining added by the employer to create retirement benefits for you. Employees provident fund (EPF) is one such employment-based plan where both parties make an equal contribution to the plan. Under this scheme, anyone over the age of 54 can withdraw 90% of their savings.

Public Provident Fund

This is a government initiative where one can buy the plan from a Pension Fund regulatory and developmental authority-recognized organization. A PPF helps build a retirement fund through the regular payments that you will make. Every year you can invest a minimum of ₹500 to a maximum of ₹1,50,000 for the tenure of the fund, which is 15 years. Once your tenure is over, you can extend it by five years as many times as possible. A PPF also comes with tax benefits under Section 80C of the Income Tax Act. One benefit of this scheme is that you can withdraw small sums after seven years of tenure.

National Pension Scheme

This is a government-based plan (in Tier 1) with tax benefits and withdrawal allowed only after ten years of investing, which is the maturity period. Such an after-retirement plan allows only 40% of withdrawal, and the rest is given as regular income. Tier 2, on the other hand, comes with more flexibility in taking your money out and is not exempt from tax.

Whole Life ULIPs

One of the most opted-for among the various types of retirement plans, the whole life ULIPs are great for you. In this plan, the policyholders’ money remains invested for their whole life. Once they retire, they can make partial withdrawals from the available funds completely free of tax. Moreover, the policyholders can make withdrawals whenever required or necessary.

Government Retirement Plans

The Atal Pension Yojana (APY) is a government-sponsored pension scheme targeted at unorganized sector workers and individuals not covered by any social security scheme. It aims to provide a defined pension amount based on the contribution made and the age of the subscriber at the time of joining. The minimum age of entry is 18 years, and the maximum is 40 years. The contributions are invested in a pension fund managed by PFRDA (Pension Fund Regulatory and Development Authority). The APY provides a guaranteed minimum pension amount ranging from ₹1,000 to ₹5,000 per month, depending on the contribution and age at entry.

How to Buy Pension Plans in India?

As people approach retirement, securing a stable and comfortable financial future becomes a top priority. Pension plans play a crucial role in providing individuals with a regular income post-retirement, ensuring financial independence during the golden years. In India, there are various pension plans available, each offering distinct benefits and features.

Step 1: Understand the Types of Pension Plans

Before delving into the buying process, it is essential to familiarize yourself with the different types of pension plans available in India.

Step 2: Assess Your Retirement Needs

Analyzing your financial needs and goals during retirement is crucial before selecting a pension plan. Consider factors such as your current lifestyle, expected expenses, and any other sources of income you may have during retirement. This assessment will help determine the ideal pension plan and the amount of contribution required to secure your desired post-retirement income.

Step 3: Research and Compare Pension Plans

With a clear understanding of your retirement needs, it’s time to research and compare various pension plans offered by different insurance providers. Look for features like annuity options, vesting age, flexibility to change premium amounts, and the option to add riders for additional benefits. Online comparison tools and seeking advice from financial advisors can be helpful in making a well-informed decision.

Step 4: Check for Riders and Additional Benefits

Some pension plans offer riders or add-ons that provide extra benefits for specific situations. These may include critical illness cover, accidental death benefit, disability rider, etc. Evaluate if any of these riders align with your needs and consider their inclusion in your chosen pension plan.

Step 5: Consider the Annuity Options

Annuity options determine how you will receive the pension payouts during retirement. There are different types of annuities, such as:

a) Life Annuity: Regular payouts for life.

b) Joint Life Annuity: Payouts for the lifetime of the policyholder and their spouse.

c) Increasing Annuity: Payouts increase annually to counter inflation.

d) Deferred Annuity: Accumulation period where the corpus grows before the annuity phase begins.

Select the annuity option that best suits your requirements and offers financial security for you and your loved ones.

Step 6: Check the Vesting Age and Surrender Policies

The vesting age is the age at which you can start receiving the pension. Ensure that the chosen pension plan aligns with your expected retirement age. Additionally, understand the surrender policies of the plan, which come into play if you need to withdraw the funds prematurely. It is essential to be aware of any penalties or restrictions involved in early surrender.

Step 7: Review the Charges and Fees

Carefully review the charges and fees associated with the pension plan. These may include premium allocation charges, policy administration fees, fund management charges, etc. Opt for a plan with transparent and reasonable charges to maximize your returns.

Selecting the Right Retirement Plan

Now that you are aware of the different types of retirement plans that you can opt from, it’s time to clarify the types of retirement. There are different types of retirements too.

  • Traditional retirement
  • Temporary retirement
  • Early retirement
  • Semi-retirement

It is advised to invest only in one type of retirement that you are planning to opt for after considering all the aspects. Nowadays, many people are opting for early retirement and planning aggressive savings at an early age to have enough savings summed up to sustain the rest of their lives.

Initially, the concept of early retirement was Western, but today many Indians are also opting for it and investing in current policies like Unit Linked Insurance Plans (ULIPs) to make the most out of their investment and achieve their investment goals quickly for retirement. So, now it must be clear that choosing your retirement plan from the different types of investments for retirement depends on the different types of retirement itself.

Why is a Retirement Plan Important?

As time passes, the value of liquidity generally depletes if it is not invested and earns interest and bonuses on it. Moreover, we are all aware that inflation might leave you financially displaced if you don’t plan your financial future.

There are many types of retirement plans available in the market. However, each one serves the same financial goal through different techniques. From these types of retirement plans, you must choose one that helps you ensure that your savings are intact when you retire and that you have enough monetary resources to take care of yourself in old age.

To Sum it Up

All these retirement plans come with different types of retirement benefits, which you must know and understand before choosing one. However, a personal or government-based plan is usually suggested. Protecting your future in more ways than one is always beneficial, so analyze your needs and goals and make a well-thought-of decision!

Also, you must ensure that your plan is sufficient to adjust the long-term requirement and that you get decent returns to manage the long-term requirements and future financial needs.

Key takeaways

The types of retirement plans are as follows:

  • Insurance-based plans are post-retirement plans bought directly from the insurance company.
  • If you work as an employee in some company, your employer will set up a retirement plan.
  • PPF is a government initiative where one can buy the plan from a Pension Fund regulatory and developmental authority-recognized organization.
  • National Pension Scheme
  • The Atal Pension Yojana (APY) is a government-sponsored pension scheme targeted at unorganized sector workers and individuals not covered by any social security scheme.

FAQs

1

What is an Annuity in Pension Plan?

An annuity in a pension plan refers to a financial product that provides a regular stream of income during retirement. It is typically purchased using a lump sum or regular premium payments made during the working years. The annuity payments are designed to continue for the rest of the individual’s life or a specified period, ensuring a steady income source post-retirement.

2

Are There Any Tax Benefits on the Different Types of Retirement Plans in India?

Yes, there are tax benefits associated with various retirement plans in India. The most common tax-advantaged retirement plans in India include the Employees’ Provident Fund (EPF), Public Provident Fund (PPF), National Pension System (NPS), and pension plans offered by insurance companies. Contributions made towards these plans are eligible for tax deductions under Section 80C of the Income Tax Act, up to a specified limit. Additionally, some plans offer tax-exempt withdrawals or maturity proceeds, making them attractive options for retirement savings.

3

Should I Buy a Retirement Plan?

It is advisable to start investing in a retirement plan as early as possible. The power of compounding can significantly benefit those who begin saving for retirement at a young age. By starting early, you can contribute smaller amounts over a more extended period, which may result in a larger corpus at retirement. However, if you haven’t started yet, it’s never too late to begin. The key is to prioritize retirement planning and start making regular contributions to build a secure financial future.

4

How Much Should I Invest in a Pension Plan?

The amount you should invest in a pension plan depends on various factors, including your current age, desired retirement age, lifestyle expectations, and expected inflation rate. It’s essential to assess your financial goals, risk tolerance, and other existing retirement savings (like EPF or other investments) when determining the contribution amount. A financial advisor can help you create a personalized retirement plan based on your unique circumstances and provide guidance on the ideal contribution amount to meet your retirement goals.

5

If I Have A PF Account, Do I Still Need a Retirement Plan?

While having a PF (Provident Fund) account is a good start towards retirement savings, it may not be sufficient to meet all your retirement needs. PF accounts are typically employer-sponsored and primarily focus on providing a lump sum amount at retirement. However, having a separate retirement plan, such as an individual pension plan or investment in mutual funds or the National Pension System (NPS), can offer additional benefits like regular income through annuities or more extensive investment options. Diversifying your retirement savings through various avenues can provide a stronger financial cushion for your retirement years.

- 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