What is the definition of a pension?
Pension is a kind of retirement income that you planned throughout
your life to ensure an income source. It is an investment that grows
through regular contributions. Planning at the early years of your
career will helps compound the corpus many times by the time you
retire!
Retirement is the time when you would like to spend your days doing
what you love- travel, live in the farmhouse, start a poultry farm,
restaurant etc. However, we have come across many people who are
not very comfortable about retirement thinking that their regular
income will then become irregular.
Everyone must retire at some point from their working lives. We must
plan on how we will live our lives to the fullest then! We all know
of
inflation and how it affects our expenses, with each passing year.
Imagine that all have a great retirement dream, but there is a cost
attached to it, you know there won’t be regular income and expenses
will continue to rise. Hence, we feel it becomes imperative that we
start saving systematically to enjoy our retired life to the
fullest.
Not only is retirement planning an essential aspect of one’s overall
financial planning exercise but also crucial to be commenced early
in
life. One must remember that systematic and early retirement
planning can help you to reduce your financial burden incurred
during
the post-retirement years.
How Does Pension Work?
In general, there are different ways in which pension
plan functions.
An individual's pension fund can be created by sharing the
contributions between their employer and themselves. In such a case,
the employer is usually responsible for the larger percentage of it.
Additionally, an individual can create a pension fund by depositing
a
certain amount into a pension plan. Upon retirement, the person will
receive the payments as an annuity, depending on the chosen plan.
It is crucial to understand what pension amount you required at the
time of retirement and the current contribution for that is
necessary to
get the same amount. The main function of pension in life is to act
as
an income source. Hence, it must be adequate to cater to future
financial requirements.
Types of Pension Plans:
Most of us work hard for a good part of our lives to fulfil several
responsibilities. We delay our personal goals to manage the expenses
efficiently in the present. However, life after retirement is a time
when
you can focus on yourself.
It is precisely what is pension plan capable of doing if you plan
carefully. It will give you the financial independence needed to
live a
comfortable life in the absence of an income source.
The pension plan definition and relevance may differ for people from
varying backgrounds. As per the 'Population Projections for
India and
States 2001 - 2026', India's share of the elderly population
would
increase to 12.4% by 2026. A wide range of such pension plans are
available in the market to accommodate them.
The distinction in what is pension for diverse financial profiles is
why
we have plans with different structures and benefits. These plans
may
vary in terms of pay-out time, the nature of the investment, and
annuity. Depending on your demands, you can look for the relevant
pension information.
Options to Build Pension Fund
Here are some of the
options that will help you to understand what
pension scheme with different frameworks is:
- 1. Deferred Annuity
A deferred annuity plan helps create a corpus within a specific policy term through a single or regular premium payment. After completing the policy term, you receive the amount as a pension. It also provides the benefit of tax exemption and the option of making a lump-sum payment or periodical contributions. - 2. Immediate Annuity
With an immediate annuity plan, you can get the pension immediately. It requires a lump-sum payment, which is eligible for tax exemption. Here, the nominee receives the pay-out in the event of the insured's demise during the policy tenure.
- 3. Annuity Certain
The pension plan definition for Annuity Certain refers to a policy that offers payment for a specific number of years. It is up to the policyholder to choose the period for which they will receive the pension. In case of an unfortunate incident within the policy term resulting in the insured's demise, the remaining amount will benefit the beneficiary. - 4. Pension Plan with Life Cover
A pension plan with life cover gives the dual benefit of investment and life insurance. The policyholder's family members are entitled to a lump-sum payment if the policyholder passes away within the policy duration. Notably, the payable amount may not be enough since most of the premiums for the policy are utilized to build the pension corpus for the insured. - 5. Guaranteed Period Annuity
The Guaranteed period annuity provides the pension amount to the policyholder for periods such as 5, 10, 15, or 20 years. The payment is not dependent on the survival of the insured throughout the policy term. - 6. Life Annuity
The life annuity option allows the policyholder to receive a pension until they pass away. If the plan has the "with spouse" option, the policyholder's spouse keeps receiving the amount after their demise. - 7. National Pension Schemes (NPS)
The government of India offers NPS to protect the financial future of senior citizens. The investment in these schemes is divided into equity and debt funds, per the policyholder's preference. The policyholder can withdraw 60% of the generated returns on investment upon retiring, and the rest can be used to purchase the annuity. - 8. Pension Funds
As the policyholder, you need to invest a fixed amount in a pension fund of your choice for a specific duration. With time, the fund value increases, and so does the returns on your investment. It is up to you to withdraw the amount, continue the investment or make it a regular income source upon retirement.
Once you start earning, it is never too early to prepare for retirement. You can begin by reviewing the pension information for different schemes. It may give you a better idea of the requirements for life after retirement. Proper planning also provides time for your investments to grow and yield better results.
Therefore, it is vital to recognize what is pension scheme and the options available to make an informed decision. It is also crucial to understand what pension has different implications for each of us.
Let's discuss the things you should remember when determining the best retirement plan per the pension information.
- 1. Consider Your Expenses
It is an essential part of retirement planning to map your future expenses. It includes your monthly and other significant costs that need to be covered with the income source. You must also factor in the medical treatment costs since you are likely to be more vulnerable to health issues at an older age. - 2. Impact of Inflation
The amount of money that you invest today needs to be planned according to its expected value in the future. The returns from the investment should be sufficient to carry out regular activities at least.
It should allow you to maintain a desired standard of living once you stop earning. When looking for the right policy, remember to check if the pension plan features are aligned with your crucial financial goals. - 3. Debt Repayment
A significant portion of your earnings may go into repayment of any outstanding debts. You must consider if the duration of these debts extends to life after retirement. Using a retirement calculator can make it easier for you to plan your finances. - 4. Policy Features
Understanding what pension plan and its implications on your life can be challenging at a younger age. However, it is helpful to be aware of the pension information as it gives you a better picture of life after retirement. If you are not aware of the different policy features, it is harder to envision a life without any parameters of saving for it.
Factors To Consider Before Investing in Fixed Deposits
Here are a few things you should be aware of before choosing to invest in fixed deposits and decide which bank or NBFC is best for deposit.
- ● Deposit Limit
The first factor to consider is the deposit limit. The deposit limit refers to the maximum amount a bank can offer in a fixed deposit. This is because banks often use this amount as a benchmark when assessing whether to offer you a fixed deposit. - ● Interest Rates
The next thing you need to consider while investing in fixed deposits is the interest rates different banks or NBFC offer. The interest rates charged by different banks can vary depending on their ratings and financial strength. - ● Liquidity
This means how quickly your money will be available when needed. In addition, you should ensure that the bank has enough cash reserves to pay out your fixed deposit when it matures (after a certain period). - ● Tax Benefits
A fixed deposit is a good option if you want to benefit from a tax deduction on your earnings. The Government provides an interest rate deduction in the form of tax, which you can claim as an exemption from Income Tax. The amount of interest you can claim depends on your income and other factors. - ● Tenure
The tenure of a fixed deposit is one thing you should consider beforehand. Before investing in any financial instrument like fixed deposits, you must know how long your money will remain in the bank for safe keeping and its interest rates. - Conclusion:
A fixed deposit is the correct choice if you have a large amount of money saved to invest. Fixed deposits and recurring deposits are investments without risk.
While FDs are safe investments, to decide which one to opt for one must investigate certain factors like the surety of earnings, risk calculations, cash earnings, pay-outs, etc is tricky. One must always plan such investments by researching different schemes and benefits and choosing the most rewarding scheme.
Things to remember while planning Retirement -
- 1. Determine how much you need to save regularly, starting from
today. Start
allocating as much as you can towards your retirement kitty. In
case you are
currently not able to set apart the funds required then start
with whatever is at
your disposal.
- 2. Start saving now! Then you will have time on your side and can enjoy the power of compounding till retirement.
- 3. Systematically invest a fixed amount every month for your post-retirement years and lead a tension free healthy retirement.
Reference:
https://pensionersportal.gov.in/retire-benefit.aspx#a1
https://www.india.gov.in/spotlight/national-pension-system- retirement-plan-all
https://www.pfrda.org.in/writereaddata/links/crisil pfrda report869bc61d-a231-42de-a77c-ff614b0af650.pdf
Start Your Investing journey today by signing up with Indian Investment Services. Happy Investing 😊