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5 Things You Need to Know About Pension Planning

Introduction 

Rajesh is a mid-aged individual working in the corporate sector. He has an excellent job and significant assets. But whenever Rajesh looks at his father, a retired government official, he worries about how he will manage finances and live a joyful, happy life after retirement? Now that he is working and investing for greater returns, will they give him the life he wants? 

If you, too, are someone who worries about your post-retirement life, then don’t worry. Our blog will help you understand and guide you on what to do after retiring.

What is Pension Plan?

Pension plans help you deal with the uncertainties post-retirement and ensure a steady income flow after retirement. Even if a person has a good amount of savings, a pension plan is nevertheless crucial.

Pension plans have several benefits like guaranteed income, tax efficiency, liquidity, etc.. Still, one should do retirement planning to have a stress-free, peaceful post-retirement experience. 

5 Important Things to Know About Pension Planning

  • Working Procedure of a pension plan

A pension policy has two stages:

    • Accumulation stage

This is the first stage of a pension plan. From the moment you acquire the plan, and until you are in your retirement phase, it is the accumulation stage. As the name suggests, it’s the time when you accumulate your money by paying premiums that are later invested. The dividends paid are eligible for tax compensation in Section 80C of the Income Tax Act, 1961.

    • Annuity stage

This is the second stage of the pension plan. As one retires, they can withdraw a maximum of 1/3rd of the collected money in the accumulation stage. The 2/3rd of funds cannot be eliminated as it will be used to purchase an annuity scheme. This annuity program will become the leading source for your pension till death. 

  • What are the plus points?

Pension plans are easy to implement and understand. All you have to do is pay your installments timely and sit back relaxed till it matures. It also develops discipline. Since untimely payment or non-reimbursement of the premiums can result in more expensive rates, you will not skip it. This is very beneficial for spender you can’t resist spending.

Another reason this is better is that in a market crash situation, you wouldn’t be paying your mutual fund’s plans or unit-linked insurance plan premiums. Just because you were forced to proceed paying premiums because of the fear of higher rates, you were able to sit on the handsome gains after the recovery. 

  • Buying an annuity is necessary.

Regarding pension plans, one has to compulsorily get the annuity policy to get 2/3rd of the collected money. If in between you move out abroad and decide to stay there forever, then you’d want to make your fortune with you, but you can’t do it. Even if in case of a sudden emergency like a medical emergency, you can’t take your cash out. 

Whereas if you had invested this same money in other finance modules, you could have used it your way with no strings attached. Even with the best pension plan in india, constraints can be a massive dilemma with pension plans.

  • Taxation can be a concern. 

Tax is another complication with pension plans. Firstly, when the program matures, you can withdraw barely 1/3rd amount as free of tax. You can take out the whole amount tax-free in other procedures like a PPF or equity mutual funds. Secondly, the premium that you’ll receive in the annuity period will be taxable. But if given a choice, one will like to opt for a further tax-efficient alternative.

Section 80 CCC can work just in theory, specifically after a limit of 1 lakh rupees put under Section 80 C. This limit can be easily exceeded with ongoing provident funds, home loans, tuition fees,  insurance premiums, etc. Hence, you might not get any tax advantage even from the best retirement plans.

  • Flexibility suffers

Another thing which you need to know about pension plans because you can’t change them in between. You will be tied to this fund for very long years. They are extended commitments, and you can’t leave them quickly or at all before it matures. There can be times where you’d feel like going it, but you just can’t. 

Conclusion

Planning a retirement plan is as important as other needs of life. There are a lot of pension plans from which you can choose based on your needs. Every project has its advantages and benefits. But above all of it, you need to secure your post-retirement financial future by signing up for a pension scheme.

FAQs:

What is the best time to start making pension plans?

The best time to make pension plans is as early as possible if you want greater returns on lower premiums. Get the help of a financial broker or a brokerage firm to get information about all the existing pension plans in india.

When can I access my pension money?

Typically it is 65 years, though many pension plans allow you to start collecting retirement benefits as early as age 55.

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