All about a Pension Plan

The average age of retirement which used to be in the range of 55 to 60 years, is now decreasing as more and more individuals plan to quit regular 9 to 5 work at an early age, and spend the later part of their life fulfilling their dreams. Retirement planning through a pension scheme guarantees regular income to the policy owner in the form of annuity or pension.

Types of Annuities or Pension Plans:

Life Annuity: It ensures a stipulated regular income to an individual throughout his life. In case of death of policyholder, the invested amount is refunded to his nominee.

Guaranteed Period Annuity: It provides regular fixed income throughout an individual's life and also guarantees payment for a certain number of years to the nominee in case of a policyholder's death.

Deferred Annuity: In this type of annuity the policyholder 'defers' or postpones the annuity up to a certain time period, hence it does not commence immediately. The premium payment options in such a policy are either regular annual premiums or a single lump sum premium.

Annuity Certain: In this type of plan, a stipulated amount of annuity is paid for a fixed term (in years) irrespective of how long the policyholder lives.

Factors to be considered while investing in a Pension Plan:

·         Compare the premium in various pension plans and then select the one that best suits your requirements.

·         Check whether the plan is with cover or without cover. The former offers the sum assured to be paid to the nominee in the case of an eventuality, while in the latter case there is no sum assured and the nominee receives only the amount net of unpaid premiums and expenses.

·         Check the performance of the various pension plans offered by the insurer.

·         A traditional pension scheme invests a considerable portion of the premium in government securities (G-Secs) and bonds, thus yielding low returns. Comparatively, investing in a ULIP pension plan provides higher returns (if the investment in ULIP is well diversified).

·         Investment in a ULIP pension insurance policy should be made only after considering the various charges involved like allocation charge, fund management charge etc.

·         Check the charges and deductions applicable on surrendering the policy before maturity in case of emergencies.

·         Check for tax benefit provisions in the Pension Plan. Premium payments towards a Pension plan are eligible for rebate under Section 80CCC.

There are also some initiatives taken up by the government to promote old age income security, like New Pension Scheme (NPS). It is a defined contribution based pension plan. The NPS is regulated by Pension Fund Regulatory and Development Authority (PFRDA).

It is important that individuals evaluate pension plans from a retirement benefit perspective and invest at an early age. In other words, the earlier you take the step of investing in a pension plan, the better retirement benefits you reap on maturity of the plan.