Many people look forward to retirement. It’s the time in your life when you can finally change pace and not be bothered with work deadlines and stresses. You’ll also be able to start doing the various hobbies and other activities that you’ve been planning for. Another aspect to look forward to is your pension withdrawal.
Depending on the pension withdrawal rules surrounding the retirement fund you have selected, you might have to choose between lump-sum and regular pension payments. In this instance, you might be interested to know the difference between the two. We’ve compiled an in-depth comparison of both options to assist you with making the perfect choice for your specific needs.
There are generally two types of pension payments—Lump-sum vs regular pension payments. We’ve added the top advantages and disadvantages of these two options. This will assist you in making the best choice for your specific retirement needs.
Generally, a lump-sum payment refers to a one-time payment received from your retirement plan. It works by providing you with a large amount of money which can easily be used for whatever financial goal you have allocated for this time. Some examples people have used their lump-sum amount on include the following centers:
The closer you get to retirement, the more interested you will become in the amount of money you’ve built up in your portfolio. In fact, you might want to perform regular checks to determine how much money you’re guaranteed of getting. This will help you identify whether or not you need to increase the funds you’re placing in the fund to ensure what you’ll get is what you need.
The good news is that you can perform a pension lump-sum calculation by accessing our pension calculator. This is an online tool that assists you in determining the amount of money required to reach your retirement goals. Factors such as age, desired retirement age, annual income and inflation rate are used to determine the initial lump-sum.
There are a few substantial benefits to opting for a lump-sum payment. The most significant of these are mentioned below.
One of the best lump-sum benefits centers around the flexibility it offers. Policyholders can easily fulfil a range of different financial goals that wouldn’t have been possible under other circumstances. A policyholder can choose to keep and use the entire lump-sum or re-invest portions of it in other plans.
A larger immediate income allows the policyholder to take care of any financial responsibilities such as children’s education or even marriage. The insured also has the option to reinvest a portion of the money as life insurance or back into their investment portfolio. If re-investing is an option you might consider, your broker will be able to advise you about the best lump-sum investment options best suited to your portfolio.
In the event of an unfortunate event, the remaining monies can be transferred to the policyholder’s beneficiaries. This will give the policyholder peace of mind that his family will be taken care of in the event of their passing.
Receiving the bulk of your retirement plan all at once can also have credible drawbacks. The two most common are listed below.
Lump-sum payments are subject to tax deductions as they are classed as taxable income. That means you will have to deduct the expected tax payments before you start planning how you’re going to spend the money.
Having instant access to a large amount of money can often lead to irresponsible overspending. This leads to the policyholder running out of funds too soon. It’s important to maintain a disciplined budget. Policyholders should keep in mind that they most likely will not be in a position to rebuild such a considerable portfolio once the money is spent.
Some policyholders might want to place a portion of their money in conservative investments. Doing this could leave them at risk of not being able to keep pace with the fluctuating inflation rate. If policyholders want to re-invest some of the money from their lump-sum, they should speak to their broker for the most trusted investment options.
The other alternative to consider is regular pension payments, commonly referred to as pension annuity. This can be defined as regular income payments that you will receive for the rest of your life once you have made a considerable lump-sum investment.
As with the lump-sum pension plan, pension annuity’s also have their own benefits. The two that stand out are listed below.
Contrary to the lump-sum pension, a pension annuity offers the policyholder regular income payments throughout their life. These payments are not reliant on fluctuating financial market conditions and can be used for everyday expenses. The monthly premium is paid out like a salary and the policyholder does his own budgeting.
With a pension annuity, you also don’t have the added stress of deciding what to do with a large lump-sum amount. You will also have peace of mind that you haven’t irresponsibly spent your life savings. If the money is secured in a pension annuity, the insured has the peace of mind that their money is secure.
With this in mind, it’s always recommended to choose a life insurer that boasts a claim settlement ratio of at least 97%. They should also have a solvency ratio of over 1.5. This type of reputation will guarantee a continuation of the insured’s annuities for life.
One of the top policies that you can consider is the PNB MetLife Mera Jeevan Suraksha Plan. It’s designed to ensure financial security for you and your family. With this policy you can look forward to the following benefits:
Lump-sum vs annuity—which is better? Essentially, one option is not necessarily better than the other. It largely depends on the financial goals you have set for yourself when you retire. If you have no actual need for such a large sum of money at that time, it might be an excellent idea to opt for a regular pension payment plan. This will ultimately ensure that you do not overspend or waste money.
Before making the final decision, it’s recommended that you consider factors such as monthly expenses, outstanding debt, your health condition as well as other existing savings sources. All these factors will help you choose the option best suited for your retirement plans.
In the event of your death before your 75th birthday, it can be passed onto beneficiaries tax-free. This is of course if you haven’t started drawing money from the fund. Private pension payments after death can also be taken as a lump-sum, used to purchase an annuity or even invested in a drawdown.
Yes. You can opt to take a partial lump-sum and you also have the option to continue contributing to your pension plan. This will provide you with a lump-sum to achieve certain financial goals as well as continued premiums to ensure that you have a pension fund that will payout in monthly increments. Speak to your broker consultant for the various options that will enable you to do this.
Essentially, this would depend on which option suits your particular financial goals. However, lump-sum payments generally provide you with considerably more control over your money. It allows you the flexibility of spending your money as you need it. Several studies show that retirees who have opted for monthly payments tend to maintain their spending levels, whereas people who opt for lump-sum payments are more likely to save.
Yes. The pension you’ll receive is taxable under current Tax Regulations. Always check with your broker about the various tax laws that apply to the policy you’re interested in taking.
Disclaimer:
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
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