Pension planning is a crucial aspect of financial planning, especially in India where the concept of joint families is gradually giving way to nuclear families. This shift underscores the need for individuals to plan for their retirement independently. A pension plan, in simple terms, is a financial product that helps you save a portion of your income during your working years to secure your financial future post-retirement.
There are primarily two types of pension plans in India – Defined Benefit and Defined Contribution. The Defined Benefit plan promises a specific pension amount, while the Defined Contribution plan’s pension depends on the investment’s performance. Understanding these can help you choose the best pension plan in India suited to your needs.
Reasons to avail Pension plans
Rising life expectancy
With healthcare advancements and ameliorated facilities of healthcare, life expectancy is on the rise. This increment in longevity infers that individuals will spend a bigger part of their lives in retirement. As an outcome, it is crucial to have a pragmatic financial cushion to support this for considerably longer post-retirement life. With zero adequate savings, the extended time period can become financial stress instead of enjoyment or comfort.
Long-term financial security
Pension plans are prepared to endow a stable income source post-retirement, which is essential for financial security and freedom. When you contribute to the pension plan during your working time period, you are establishing a financial reserve that will pay constant income after you retire. This income may be in the form of annual, quarterly, or monthly payouts, based on the plan structure. This ensures that you have a dependable financial help system during retirement days, lowering the reliability on others and maintaining your living standards.
Inflation erodes the value of money over time, reducing the purchasing power of your retirement corpus. Good pension plans are structured to offer returns that not only grow your savings but also potentially outpace inflation. By investing in a mix of securities like equities, bonds, and other assets, these plans aim to deliver returns that help maintain the real value of your savings over the long term, ensuring that your retirement fund retains its purchasing power.
Regular contributions to a pension plan inculcate a habit of disciplined saving. These plans often require periodic investments, either monthly, quarterly, or annually, which encourages savers to set aside a portion of their income regularly for long-term goals. This disciplined approach to saving ensures that a substantial retirement corpus is built over time.
Pension plan investing comes with tax-saving advantages as per income tax laws. Contributions to specific pension schemes qualify for tax deductions as per Section 80 C, 80 CCD, and 80 CCC, which can lower your taxable income. This tax advantage serves as an incentive for individuals to save for their retirement days while lowering their present tax liability.
Pension plans can be an integral part of your estate planning. Many plans offer a nominee or beneficiary feature, where you can name a person(s) who will receive the benefits of the plan in the event of your untimely demise. This helps in ensuring that your loved ones are financially taken care of and that your assets are distributed as per your wishes.
Pension funds are typically managed by professional fund managers who allocate investments across various asset classes such as equities, bonds, and government securities. This diversification helps in spreading out the risk, as not all asset classes react the same way to market fluctuations. Thus, it reduces the overall risk of the investment portfolio, providing more stable and consistent returns over the long term.
Some pension plans in India come bundled with an insurance policy. This feature provides life cover, ensuring that in the case of the policyholder’s untimely death, a lump sum amount is paid to the nominee. This dual benefit of savings for retirement and life cover provides financial security to the policyholder’s family.
Liquidity in emergencies
While pension plans are primarily for retirement savings, some plans offer the flexibility of partial withdrawals in case of emergencies. This feature can be beneficial in situations where you require funds for unforeseen circumstances like medical emergencies or financial hardships before retirement. However, it’s important to use this feature judiciously to ensure that the primary goal of retirement savings is not compromised.
Pension planning strategies
Start early – The sooner you start, the larger the corpus you can accumulate due to the power of compounding.
Increase contributions with income – As your income grows, proportionally increase your pension contributions.
Regularly review your plan – Adjust your investment based on changing life stages and financial goals.
Diversify investments – Don’t put all your eggs in one basket. Diversify across equities, bonds, and other asset classes.
Opt for a balanced fund – For a moderate risk profile, a balanced fund that invests in a mix of equities and bonds can be ideal.
Understand the charges – Be aware of all the charges involved in your pension plan, like administration charges, fund management fees, etc.
Consider inflation – Choose plans that offer returns that can potentially beat inflation.
Utilise tax benefits – Make full use of the tax benefits available under various sections like 80C, 80CCC, and 80CCD.
Insurance cum pension plans – Look for plans that bundle an insurance policy, offering dual benefits.
Opt for automatic switching options – Some plans offer the option to automatically switch from equity to debt as you near retirement.
Annuity options – Understand the various annuity options – like life annuity, annuity certain, and joint-life annuity.
Regular periodic plans – Plans that allow periodic withdrawals can be useful for meeting regular expenses post-retirement.
Remain Informed – Keep yourself updated about new pension products and changes in regulations.
Get in touch with an advisor – If needed, seek professional advice to choose the best pension plan.
Pension planning is not just about securing your financial future; it is about ensuring a comfortable and independent retirement. By understanding and implementing these strategies, you can make informed decisions and choose a pension plan that best aligns with your retirement goals.