Benefits of Pension Plans

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Pensionplans or retirement plans offer you the dual benefits of investment and insurance cover. It is nothing but investing a certain amount regularly to accumulate over a specific tenure in a phase-by-phase manner. This will ensure a steady flow of monthly pension once you retire. Provident Fund, for example, is a popular retirement planning scheme.

If you begin contributing early, it will build towards a secure golden year money-wise. A well-chosen retirement plan can help you rise above inflation, thanks to the power of compounding. The corpus  in your name by the retiring age can take care of increasing healthcare costs and lifestyle requirements.

Benefits of Pension Plans
a. Guaranteed Pension/Income
You can get a fixed and steady income after retiring (deferred) or immediately after investing (immediate), based on how you invest. This ensures you a financially independent life. Use a retirement calculator for a rough estimate of how much money you might require monthly after retirement.


b. Tax-Efficiency
Pension plans are entitled to tax exemption specified under Section 80C. If you want to contribute to pension plans, the Indian Income Tax Act, 1961, offers significant tax respite under Chapter VI-A. Section 80C, 80CCC and 80CCD specify them in detail. For instance, Atal Pension Yojana (APY) and National Pension Scheme (NPS) are subject to tax deduction under 80CCD.


c. Liquidity
A retirement plan is essentially a product of low liquidity. But some companies offer pension funds that let you withdraw even during the accumulation stage. So, you will have funds to fall back on during emergency without having to rely on bank loans or borrow from other people.


d. Vesting Age
This is the age when you begin to receive the monthly pension. For instance, most pension plans keep their minimum vesting 40 or 50. It is flexible up to age 70, though some companies do allow the vesting age to be up to 90.


e. Accumulation Duration
The investor pays the premiums regularly or once in this period. This is when the wealth accumulates to build up a sizable corpus. For instance, if you start investing at the age 30 and continues investing till age 60, the accumulation period will be 30 years. Your pension for the chosen period essentially comes from this corpus.


f. Payment Period
Do not confuse this with accumulation period. This is the period in which you receive the pension after retiring. For instance, if one receives the pension from the age 60 to age 75, the payment period will be 15 years. Most funds keep this separate from accumulation period, though some funds allow partial/full withdrawals during accumulation periods too.


g. Surrender value
Surrendering one’s pension plan before maturity is not a smart move even after paying the required minimum premium. This results in the investor losing every benefit of the plan including the assured sum and life insurance cover.


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