Pension plans are a type of investment that allows you to invest a small sum through your working years and use the accumulated amount when you attain retirement. Read on to know more about the types and importance of pension plans in India.
Pension plans, which are also commonly referred to as retirement plans, are types of investments that allow you to invest a small amount periodically and build a corpus over time. The primary purpose of investing in a pension plan is to get financial security during old age.
Pension planning allows you to live a financially independent life without compromising on living standards after you stop working. After you retire, if you don’t have a regular stream of income, you may run out of savings, and you may face financial hardship, especially if an emergency occurs. To avoid such a situation, it is vital to start investing in a pension plan early.
Types of Pension Plans in India
A good pension planning is impossible without investing in a good pension scheme from a reliable and trustworthy scheme provider. In India, different pension schemes are divided based on the benefits offered and structure. Some of the popular pension plans in India are:
- Deferred Annuity
A deferred annuity pension plan allows you to build a substantial corpus through regular payment or a lump sum payment over the scheme duration. This type of pension plan also enables you to receive a regular payout after the accumulation phase. Furthermore, the investment in such plans is eligible for tax benefits, which helps you lower your tax liability in a financial year.
- Immediate Annuity
Under this type of pension plan, you must pay a lump sum amount, and the annuity starts immediately, which means you get regular pay out. In the event of your unfortunate demise, the nominee is entitled to receive the money.
- Guaranteed period annuity
As the name suggests, this type of annuity plan, you get a payout after a specific period as defined and agreed upon in the investment papers. You can choose the annuity tenure based on your particular needs, like five years, ten years, or 15 years.
- NPS (National Pension Scheme)
This is one of the most popular pension plans in India, and it is promoted by the government of India. It was initially launched to benefit the government employees but was later opened for all, including the unorganised sector except the defense force. Under NPS, you can invest a small amount periodically in your NPS account throughout your working years. After you attain retirement, you can receive a regular income in the form of a pension.
This investment scheme also allows you to withdraw a partial amount after a specific number of years and use the remaining amount, including the interest earned on the investment, to purchase an annuity. One of the significant highlights of NPS is that the amount you invest is invested in money market instruments and provides inflation-adjusted returns.
Now that you know the type of pension plans available in India, it would help to know its importance.
The primary purpose of investing in a pension plan is to get a steady income after retirement or immediately after investing. This allows you to be financially independent in the post-retirement phase of your life. You can use a retirement calculator to get a rough estimate of how much pension you can draw based on your investment amount and tenure.
One of the biggest benefits of investing in a pension plan is its tax efficiency. The amount you invest in the plan is eligible for deduction under Section 80C of the IT Act. Depending on the type of pension plan you invest in, you also get tax benefits on the interest earned and the lump sum payout.
Most pensions in India give you the flexibility to withdraw a part of the investment during the accumulation period. This ensures that you have enough funds to meet emergency expenses and need not rely on loans.