Pension/Retirement Plans in India

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What is an Annuity/Pension Plan?

After years and years of hard work, retirement is a phase most of us look forward to in our lives. While retirement is supposed to be the most peaceful phase of our lives, one must also be aware of the fact that one’s regular monthly income comes to a stop during this time. If you have not planned for this during your productive years, you might end up facing various financial difficulties in your life.

This is where an annuity or pension plan comes into play. One of the major benefits of a pension plan is that it provides regular income to the policyholder even after his/her retirement. If you are worried about your monthly expenditure following retirement, you must invest in a pension plan and build a corpus large enough to take care of your requirements.

Pension plans typically come in many forms, and they offer flexible benefits to policyholders depending upon their requirements. Customers can choose between unit-linked retirement plans or endowment plans based on their risk appetite. Most of the insurers in the market have multiple variants of pension plans to reach out to a wide range of customers. Also, customers can choose between single premium pension plans and regular premium pension plans based on their requirements.

By starting the investment early during the productive years of their life, people can build a large corpus with only a small portion of their annual income. Alternatively, they can also pay a lump sum single premium amount and get regular income from the investment. Most pension plans allow customers to choose the age at which the annuity can begin.

Best Pension Plans in India 2019:

There are over 20 life insurers that offer different variants of pension plans in India. These plans come with flexible benefits depending upon the requirements of customers. Based on their specific retirement goals, customers can pick the right plan that caters to their needs. Listed below are some of the top pension plans in India as of 2019:

Types of Pension Plans in India:

Insurance companies offer a range of pension plans in India, and while each is unique in itself, one can classify pension plans into these 7 broad categories:

1. Immediate Annuity Plans– These are plans which provide immediate pension payouts, with no waiting period to receive the pension. Most plans under this category require the premium to be paid as a single lumpsum amount, with the option to choose the time from which the annuity payout begins. Example: LIC Jeevan Akshay VI.
2. Deferred Annuity Plans – These are plans wherein the policyholder receives a pension after a specified period of time. He/she is expected to pay premiums for the policy term, with the payment beginning once the premiums are paid. One can also choose to make a single premium payment. One can choose the frequency of annuity payout, with insurers providing the option to pay it monthly, quarterly, half-yearly, or yearly. Example: LIC Jeevan Nidhi Plan.
3. Life Annuity Plans – These plans pay pension to the insured individual until his/her death, thereby ensuring that one has a regular source of income throughout his/her life. One can also choose to include their spouse under the plan, in which case the spouse continues to receive the pension after the policyholder passes away. Example: SBI Life Annuity Plus.
4. Guaranteed Period Annuity Plans – These are plans akin to life annuity plans, with the only difference being that they pay assured pension for a specific period of time, even if the policyholder passes away before this period.
5. Traditional Pension Plans – These are plans which invest the premium in safe options like government securities. These are generally risk-free, but offer lower returns. Example: SBI Life Saral Pension.
6. Unit Linked Pension Plans – These are plans which invest in market units such as stocks, securities, or bonds. They have a degree of risk associated with them but typically offer better returns. Example: HDFC Life Assured Pension Plan.
7. With/Without Cover Pension Plans – A with cover pension plan provides life cover in addition to annuity. These plans offer a death benefit in the event of demise of policyholder. A without cover plan does not offer life insurance, providing just annuity. Most plans can be enhanced to include life cover by adding riders.

Why do I need a Retirement Plan?

It is easy for one to overlook the fact that retirement brings with it financial strain. We work for a majority of our life hoping to lead a stress-free retired life, but lack of money could see one coming out of retirement to make ends meet. A good pension plan ensures that one is financially secure during retirement, with the plan providing a steady inflow of funds.

Old age is often associated with increased medical expenses, which can be a strain on financial resources, especially when one is retired. While those with a government job would receive regular pension, this might not be sufficient for the daily needs. A pension plan can enhance this income, ensuring that one doesn’t have to make changes in their lifestyle.

Additionally, pension plans can offer decent returns on investment, ensuring that inflation doesn’t reduce the value of one’s money. Certain pension plans also provide life cover, wherein the family of the insured is protected in the event of his/her demise.

The biggest factor which warrants the need of a pension plan is the peace of mind which it provides, ensuring that we can have a peaceful and fulfilling retired life without the strain of finances on our head.

Features of Pension Plans:

Some of the popular features of pension plans are highlighted below:

• Annuity options – Most pension plans come with a range of annuity options. One can choose an option which best suits their retirement needs.
• Early payouts – One can opt to receive the payout at an age of their choosing. Certain plans provide regular payouts from the age of 40 years, providing an option for early retirement.
• Flexible payments – One can choose the frequency at which they receive their pension. Most policies offer the option to choose between annual, monthly, half-yearly, or quarterly payout.
• High pension – One can choose the amount of pension they wish to receive. Most insurers do not have an upper limit on the sum assured, thereby enabling one to plan their retired life according to their lifestyle.
• Additional security – One can opt for riders to enhance the protection offered by a basic annuity plan. These riders can be purchased at affordable rates and are ideal for those looking for additional benefits.
• Rebates/Incentives – Most insurance companies offer rebates/incentives on premiums which exceed a certain limit. This helps in getting more pension at cheaper rates.
• Financial independence – Retired individuals with a good pension plan need not depend on others to meet their financial requirements.
• Protection for family – One can choose to enhance a plan by opting for life cover, wherein a death benefit will be paid to the nominee after the policyholder dies. Additionally, they can also choose to cover their spouse under a plan.

Types of Pension Plans With Tax Benefits 2019

It is important that you consider your future needs and goals and based on that decide whether you need a pension plan or not. There are different types of pension plans that you can purchase depending on your long-term goals and financial capabilities. Here we will look at the types of pension plans that you can purchase for yourself.

There are two types of retirement plans that you can purchase for yourself:

• Work-based pension plan
• Personal pension plan

Work-based pension plan

This is a type of pension plan where your employer is the master policyholder. In this type of plan, both you (employee) and the employer contribute a specific amount of money into a fixed fund on a monthly basis. These contributions would be helpful to you after you have retired from your job. Your end of the contribution is deducted from your salary.

There are three types of work-based pension plans that you can come across:

• Money purchase or defined contribution plan: The benefits that you will receive will be based on the contributions made by the employer and the employees on a monthly basis. The performance of the funds in which the contributions will be invested will also decide the benefits that you will be eligible to receive.
• Defined benefit: In this type of benefit, the pension that you will receive will be based on factors such as your annual salary, the number of years left for you to retire, etc.
• Hybrid plan: This type of plan is a mixture of both definite pension plan and defined contribution plan.

Personal pension plan

Personal pension plans are those types of plans which you can purchase personally depending on your future goals and financial capabilities. Unlike work-based pension plans, you can choose the contribution amount and the funds in which you would like to invest your money. You can also choose the cover amount depending on factors such as your age, financial capabilities, future goals, annual income, etc. There are different types of personal pension plans which you can invest in depending on your needs:

• Immediate annuity plan: In this type of annuity plan, you pay a lump-sum amount following which you will immediately start receiving the pension amount. You can also choose the frequency at which you would like to receive the pension which can be yearly, half-yearly, quarterly, or monthly. This type of plan is ideal for you if you do not want to wait to receive your pension, or if you are about to retire. The only drawback that this type of plan presents is that once you have invested in an immediate annuity plan, you cannot cancel the plan or opt out of it.

• Deferred annuity plan: These types of plans can be viewed as normal retirement plans. In this type of plan, you accumulate your savings for a fixed period of time. Once your policy attains maturity, you begin to receive your pension. For example, if you buy a pension plan with a policy term of 20 years, you start receiving your pension only after the policy term of 20 years has been completed and has attained maturity. You will decide the annuity when you purchase this type of plan where you will have the option of paying your premium either as a regular premium or as a single premium depending on the options available and your financial capability. There are two types of deferred annuity plans that you can purchase for yourself:
1. Traditional retirement plans: Under this type of plans, a part of your savings is invested in low-risk tools mainly debt instruments such as government risks. This type of plan is suitable if you don’t like taking too many risks. Due to the low-risk factor, the returns are decent in nature.
2. Unit-linked pension plans: Under this type of plans, a part of your savings is invested in different market instruments such as equity, mutual funds etc. This type of policy promises high returns and is suitable for you if you like to take risks by investing your money in high-risk instruments.

• Pension plans with/without life cover: Under this category, there are 2 types of pension plans that you can purchase:
1. Pension plan with cover: In case you die when the policy term is still in force, your nominee will receive the cover amount fixed by you when you had initially purchased the plan.
2. Pension plan without cover: In case of your death provided that the policy is still in force, your nominee will receive the corpus amount built by you till date. As the name suggests, there is no sum assured that your beneficiary will receive except for the corpus amount.

Tax benefits Pension Plans

One of the biggest advantages of purchasing a pension plan is that it allows you to receive various tax benefits. According to Section 80CCC of the Income Tax Act, 1961, you can enjoy tax benefits on the investments you have made to your retirement fund. You are also allowed to withdraw one-third of your corpus under certain pension plans in case you have any financial need and you won’t have to pay any taxes on it.

You can purchase a pension plan if you have long-term goals to take care of. Pension plans allow you to achieve your financial goals even when you have stopped working. However, it is important that you are extremely clear regarding your future needs. You must properly research and compare various plans, and only when you are sure should you purchase a pension plan which you believe will be suitable for you.

Benefits & Advantages of Annuity/Pension Plans:

Listed below are the benefits/advantages which pension plans provide:

• Tax benefits – The premiums paid towards a pension plan are eligible for tax benefits under Section 80CC and Section 10(10A) of the Income Tax Act. These can help one save a considerable amount on tax each year.
• Investment – Certain unit linked retirement plans provide one the opportunity to grow their money through strategic investments. These offer dual benefits of an investment plus insurance.
• Assured benefits – A number of pension plans offer bonuses/assured benefits, helping one meet any additional financial obligations post-retirement.
• Death benefit – One can supplement the basic pension plan by opting for a life cover wherein a death benefit will be provided to the nominee of the insured after his/her demise.
• Regular income – Pension plans provide a regular source of income to policyholders, ensuring that they can lead a hassle-free retired life.

How To Choose The Right Annuity Plan?

Choosing a good pension plan is critical to plan for retirement. Given the number of options available, one might get confused and opt for a plan which doesn’t conform to their needs. Listed below are a few simple points to consider before choosing a pension plan.

• Know your requirements – It is important to compute the financial net one might need after retirement. Individuals with additional sources of income (rent, government pension, etc.) could opt for a plan which supplements this income. Individuals who will solely rely on the pension they receive through a pension plan must plan their needs down to last detail. Failure to do this could result in purchasing a plan which offers funds which are insufficient to meet basic requirements.
• Basic pension or investment? – Choose whether you wish to just receive pension or whether the pension plan should double as an investment. There are numerous plans which invest in securities, bonds, stocks, etc. to offer higher returns.
• Flexibility – Choose a plan which offers flexibility in terms of payments. Choosing a plan which offers yearly payouts without the option to change this could result in lack of money during emergencies.
• Minimum assurance – Opt for a plan which offers a minimum assurance on the premium paid by you. This ensures that the money invested in a policy does not shrink after a specific period of time.
• Premium – Choose a plan whose premium you can afford. Opting for a plan with a high premium could land you in trouble if you have an emergency and are unable to pay the amount on time.
• Plan your retirement – Choose a plan which could offer you pension from the day you retire. There are certain plans which start payments only after a certain age is attained. These could pose a problem in case of early retirement.
• Additional protection – Opt for a plan which provides additional protection to you and your family. The plan should have the option to be enhanced with a rider to cover the spouse.
• Consult an expert – Individuals who have no idea about how pension plans work should consult an expert. One could also visit neutral websites to know the various benefits offered by a plan in order to understand it.
• Compare – One should always compare plans from different insurers. This could help in getting a better deal, ensuring that they save money.

How To Plan Your Retirement Using Pension Plans

More often than not we are told to enjoy the moment. It is essential to do so and we all love to expend on an occasional trip, a car, an electronic gadget, etc. We like to make the most of what we have and spend on things we love. Along with the present expenditures, there is no harm in saving up some money to spend in the future too. Various insurance companies, today, offer pension plans that help individuals plan a comfortable tomorrow. Each of the plans come with unique features that you can choose based on your requirements, income and age.

Planning your retirement is no rocket science. All you need is a plan and some financial help.

1. Purchase a pension plan right away: Making an early start will help individuals enjoy more benefits, thanks to the power of compounding. An individual who purchases a 35-year pension plan at the age of 25 will most definitely have a larger retirement corpus than an individual who purchases a 25-year plan at the age of 35. This is so because of the obvious fact that funds accumulate since it is compounded at a certain rate of interest every year. The difference can be found not only in plans that differ by 10 policy years as mentioned above but as many as 5 years too. So, go ahead and purchase a pension plan today in order to have a peaceful tomorrow.
2. Chalk out a plan: You can buy a pension plan based on how you dream of spending your post-retirement life. If you wish to live in comfortable space and go on a trip once a year, you should make a financial plan based on such ideas. You may also want to take into consideration your day-to-day expenses and expenditures of a dependent spouse too. Apart from these, you should ideally set aside a certain sum for medical emergencies.
3. Seek help from a financial expert: After you have planned how you want to spend your twilight years, you can contact a financial expert to help you choose the best pension plan based on the inputs given by you. While you make the plan as to how exactly you wish to live your later years, the financial expert will translate them to numbers. He will narrow down on a few pension plans and advise you to buy a plan that best suits your requirement and is affordable in terms of your present-day income.
4. Review your pension plan from time to time: The process does not end at just purchasing a pension policy. In order to make sure one’s investments will give good returns, it’s important to track the plan regularly. You may need your financial expert to help you out with this as well. If you have chosen a ULIP (Unit linked insurance plan), the expert will make sure that your investments are performing well. If not, he will switch the fund type or allocate small sums in 2-3 different fund types. Also, he can make certain alterations based on your change in plan, if any, for your retirement years.
5. Avoid spending your savings: It is important to exercise restraint when it comes to spending money that you have invested for the future. While certain pension plans have the option of availing loans, avoid doing so unless absolutely necessary. If you face an emergency, withdraw the amount you require only after making sure you’ve exhausted all other options. As long as you avoid touching your pension funds, you will most definitely achieve saving up huge money that you can enjoy in the future.

By making the right plan and purchasing the best pension plan, you are sure to lead a blissful post-retirement life without having to worry about making ends meet or letting go of things you dream to do.

Eligibility Criteria for Pension Schemes:

The eligibility criteria for pension plans comes down to three main aspects, which are given as follows:

• Entry Age – One could purchase a pension plan after attaining a certain age. Certain insurers offer plans whose minimum entry age is as low as 18 years, while others ask for individuals to be over the age of 30 years in order to purchase them. Similarly, there is an upper limit on the entry age as well, with this being around 70 years in most cases.
• Vesting age – This is the age at which one starts receiving pension. This could range from a minimum of 40 years onwards, depending on the conditions in place.
• Premium – The pension one receives depends on the premium they pay. Most insurers have minimum premium requirements for the pension plans.

Pension Plan Riders:

It is possible to enhance the protection offered by a pension plan by choosing additional riders. Listed below are some of the popular riders which can be availed in the country.

• Accidental death/disability rider – This rider provides an additional sum assured in the event of policyholder’s death due to an accident. It also provides financial support if the insured individual becomes disabled while the plan is in force.
• Critical illness rider – This rider provides protection against critical illnesses. The number of illnesses covered by the rider depend on the company offering it. The insured will receive financial aid if he/she is diagnosed with a terminal illness while the policy is active.
• Term rider – Opting for this rider ensures that the nominee receives a death benefit after the insured passes away. It essentially transforms a normal pension plan into a life insurance plus pension plan.
• Waiver of premium rider – Under this rider, future premiums are waived if the insured meets with an event which leads to disability, resulting in loss of income. It is also valid if the insured is diagnosed with an illness post which premium payments are waived.

What are Participating and Non-Participating Pension Plans?

A participating pension plan is one in which the insured receives a bonus component in addition to the regular sum assured. This could be in the form of a reversionary bonus, which is at the discretion of the company. It is basically a plan which participates in the profits of the fund in which the money is invested. The insurance company has the discretion to supplement the sum assured with any bonus in these plans.

A non-participating pension plan is one which does not accrue any reversionary bonus, with all benefits clearly stated to the policyholder. It does not partake in any profits earned by the fund.

What is Employees Provident Fund and Employees’ Pension Scheme?

The Directive Principles of State Policy state that the government shall try its best to ensure that citizens of the country have means to meet basic requirements, including those arising out of old age. As such, the Employees’ Provident Fund Organisation was set up to monitor the Provident Fund Scheme and a Pension Scheme, in addition to an insurance scheme.

The Employees Provident Fund (EPF) and Employees’ Pension Scheme (EPS) are designed to provide financial assistance to individuals during their retired life. They act as a savings tool, whereby employers and employees contribute a certain portion of their monthly income into a pool, with this investment earning interest.

EPF applies to any organisation which undertakes a task under Section 1 of the Employees’ Provident Fund Act, and employs over 20 people. Both the employer and employee make a contribution equivalent to 12% of the basic DA of an employee’s salary. This contribution is split into two components, with one going to the EPF pool and the other to the EPS.

As indicated in the table, both the funds now get a certain deposit each month. The only difference between both of them is the fact that while the EPF account earns an interest which is compounded annually, there is no provision for interest under EPS.

It is possible to withdraw the money under EPF if one is unemployed for a period of two months or more. One can also appoint a nominee who will receive the funds in the event of death of EPF accountholder.

What is PM Pension Scheme?

The Pradhan Mantri Atal Pension Yojana is a scheme designed to offer retirement solutions to individuals belonging to the unorganised sector. With a majority of the Indian population working in unorganised sectors, there was a need for a pension plan for them. Anyone between the age of 18 and 40 years can participate in this scheme, with them receiving a pension once they are 60 years old.

Individuals who joined the scheme before December 31, 2015 will be eligible for a government co-pay wherein the government will contribute an amount equivalent to half the contribution of the individual, subject to a maximum of Rs.1,000 per year for a period of five years.

A savings bank account should be opened by the individual looking to contribute towards this pension scheme. One will receive a pension ranging between Rs.1,000 and Rs.5,000 per month after retirement. The scheme provides a provision for a nominee, wherein he/she will receive the pension if the accountholder dies.

Atal Pension Yojana – Eligibility, Benefits, and Features

The Atal Pension Yojana (APY) is a pension scheme that is backed by the Government of India. This scheme was launched in order to help individuals save for their post-employment years. This scheme is ideal for individuals working in unorganised sectors and people without a steady flow of income. The scheme was announced as part of the 2015-2016 Union Budget and is currently being administered by the PFRDA (Pension Fund Regulatory and Development Authority), through the NPS architecture.

The key benefit of this scheme is that individuals can choose to either invest a sum of Rs.210 every month for a period of 42 years or invest Rs.1,454 every month for two decades. This scheme provides a guaranteed monthly pension ranging between Rs.1,000 and Rs.5,000, based on your investment amount. In order to avail the benefits offered by this scheme, individuals will have to open a savings account with a post office or a bank.

Eligibility Criteria for the Atal Pension Yojana Scheme

• This scheme can only be availed by Indian citizens.
• The Atal Pension Yojana (APY) can be availed by individuals between the ages of 18 years and 40 years.
• The exit age for the APY scheme is 60 years.
• The minimum contribution period for this scheme is 20 years.
• Only individuals with an active savings account can join this scheme.
• Under this scheme, the Aadhaar will be taken as the primary KYC. Thus, it is recommended that you have a mobile number and Aadhaar for added ease. In case your Aadhaar details are not available at the time of subscribing to this scheme, they can be submitted on a later date.

Key Features and Benefits of the Atal Pension Yojana Scheme

• The subscriber is eligible to receive a pension of Rs.1,000, Rs.2,000, Rs.3,000, Rs.4,000, or Rs.5,000. Further, the subscriber can also increase or decrease their pension amounts once a year, during the accumulation period.
• The Government of India will contribute up to 50% of the contribution made by the subscriber of Rs.1,000, based on whichever is the lower amount, for a period of 5 years. Government co-contributions are only available for those individuals who are not taxpayers and are not covered by Statutory Social Security Schemes.
• In case the subscriber delays the payment, the bank will levy certain nominal default charges.
• If the subscriber passes away, the pension amount will be paid to the spouse. Upon the death of both spouses, the pension corpus will be made available to the nominee.
• Subscribers cannot exit this scheme before the age of 60 years. Individuals will only be allowed to exit from this scheme in case of a terminal illness or death of the beneficiary.

How to apply for the Atal Pension Yojana online?

In order to apply for the Atal Pension Yojana scheme, you will first need to download the APY subscriber form from the official website of the bank in which you hold your savings account. APY forms are usually available on all bank websites. After downloading the page, you will need to fill it up with the required details and submit it to your bank branch. You will also be required to submit certain additional documents, after which your APY account will be opened.

National Pension System & its Benefits?

The National Pension System (NPS) was launched by the government in 2004 with a vision to provide a pension to all retired citizens of the country. Open to employees from both, the government sector and private sector, it invests the money in funds which are managed by the Pension Fund Regulatory and Development Authority (PFRDA).

One can choose between two account types, namely a Tier-1 account, which is designed to promote savings for retirement and a Tier-2 account. Individuals cannot withdraw any money from a Tier-1 account, ensuring that they have a corpus for retired life.

A Tier-2 account, on the other hand permits one to withdraw money from it. It is designed to promote voluntary savings.

The National Pension System offers a range of benefits to those looking for steady pension after retirement. Some of them are highlighted below:

• One can choose the kind of account they want, with it providing the option of opening either a savings account or a retirement account.
• Being a government initiative, it is transparent, with members given a daily update on their contribution. It also helps one track the money, giving them the chance to modify/increase contributions to meet any future requirement.
• The entire process is simple, with each member provided a unique Permanent Retirement Account Number (PRAN). Opening an account is easy, thanks to nodal offices present across the country.
• The scheme is regulated by the PFRDA, ensuring that the money is not invested in risky ventures.
• Even if a member were to move a job, he/she can continue using the same PRAN, ensuring that there are no cumbersome procedures to transfer the money from one account to another.
• It provides tax benefits to individuals. Those with a Tier-1 account are eligible for tax deductions on their contributions under Section 80C of the Income Tax Act. Additionally, any appreciation of the contribution and any money used to purchase annuity is tax free.

FAQs on Pension Plans