Types of Pension Plans: How to Choose for Your Retirement

Planning for retirement may not be on every young person’s to-do list. However, as the years go by, you’ll realize that it should be a high priority in your life. The main reason for this is that a sizeable pension fund allows you to preserve your standard of living long after you’ve stopped working. Therefore, no matter the age you are right now, it’s important to ensure that you have an adequate pension plan in place.

With that said, how much do you know about the types of pension plans on offer? Do you know which pension funds have the most extensive benefits? It’s important to understand the definitions and advantages of various pension plans to ensure that you select the most beneficial plan for your retirement – to benefit you and your family.

What are Pension Plans?

Wondering what is a pension plan exactly? Essentially, a pension plan is a financial tool that helps you accumulate a pre-determined amount of money for the years following your retirement. Deciding to invest a regular premium ensures that you will build a considerable fund.

Why You Need a Pension Plan

A pension plan refers to the money that you will use to live on when you retire from employment. While most people receive a fund from the government, this is often only enough to cover basic expenses. To enjoy a comfortable living, it’s always a good idea to save additional money by opting for one of the more lucrative types of pension funds.

Types of Pension Plans in India

In India, there are essentially two major categories for pension plans—government and non-government options. Their key differences are highlighted below.

Government-backed

Fortunately, the Government of India provides a few different types of pension plans to accommodate their retired population. Furthermore, these types of pension funds also provide a retirement fund for state employees. The most common national pension systems are listed below.

National Pension Scheme (NPS)

The National Pension Scheme is the primary pension scheme for government employees. With this type of national pension scheme, employees can invest premiums into their respective pension accounts at regular intervals.
Upon retirement, the insured can withdraw 60% of their savings. The remaining 40% can be used to purchase an annuity that offers periodic income. The NPS has a few appealing benefits:

• Easily provides a source of income after retirement
• Can offer a variety of tax benefits and rebates
• Allows the insured to create an extensive retirement corpus

Employee Provident Fund

The employee provident fund, or EPF, is a general government savings platform for employees who receive a consistent salary. As a monthly pension scheme, both the employee and the employer make equal contributions toward your EPF account.
The employee’s portion is deducted from their salary every month. Upon retirement, the insured will receive the total funds contributed by them and the employer as well as accrued interest.

Non-government backed

There are also several non-government-backed types of pension plans in India. The 4 main types of pension plans are discussed below.

Deferred Annuity

For the most part, the annuity type of pension plan allows the insured to receive an annuity at a specified date. Payments are made by the policyholder through a single or even as regular premium payments.

Immediate Annuity

Another popular pension scheme is the immediate annuity plan. In this scheme, the insured deposits a lump sum amount and qualifies to receive the annuities immediately. The insured chooses from a wide range of annuity options as well as the specific amount to invest.

In the event of the policyholder’s death, beneficiaries will receive the benefits. Some of the other benefits of immediate annuity are:

• Lifelong guaranteed income
• Options to avail income include monthly, quarterly, half-yearly or even on an annual basis
• Tax benefits on the premiums paid
• Top-up option to systematically increase your annuity income
• Options to receive the purchase price earlier in your lifetime

Pension Funds With Life Cover

A huge advantage of the various types of pension plans in India is that they include life insurance in addition to the investment component. This ensures that your family (or any other listed beneficiary) will receive a lump sum payout in the event of the policyholder’s death. This has two major benefits.
The first is that the policyholder has peace of mind knowing that their family will be taken care of in the event of their death. Secondly, providing the beneficiary with a lump sum payout ensures that the funds are not lost because the policyholder has passed away.

Annuity Certain / Guaranteed Period Annuity

Unlike the other types of pension plans, the policyholder in this instance receives the annuity for a specific number of years. The insured chooses the payment period (annuity term) based on what’s convenient for them. As with the immediate annuity, the appointed beneficiaries will receive the benefits in the event of an unfortunate event.

How to Choose the Best Pension Plan for Retirement

Top 5 Considerations Before Purchasing a Pension

Not all pension plans are the same. While the general concept may appear similar, it’s important to review the key differences to determine which plan will produce the best retirement corpus. The top five considerations to consider are discussed below.

1. Immediate or Deferred Annuity

When opting for a pension scheme, the policyholder will have two options:

• Immediate annuity: This means the annuity begins paying out as soon as the policyholder makes a substantial lump sum payment to the insurer.
• Deferred annuity: For the most part, deferred annuities begin payments at a pre-determined, future date. This is usually decided by the policyholder.

2. Sum Assured

A sum assured refers to a fixed amount that is paid to the beneficiary or nominee in the event of the policyholder’s death. It’s important to opt for a pension scheme that offers this type of cover for the family members that remain when you pass.

3. Accumulation Period

For the most part, an accumulation period refers to the time period in which policyholders make contributions to their pension plan. The money then serves as an investment method in retirement savings.

4. Pension Payment Period

This refers to the period that you will be required to pay funds into the pension scheme. In addition to the period, check if the policy requires a once-off lump sum or rather smaller, monthly payments. Which will suit your current financial circumstances better?

5. Surrender Value

Essentially, the surrender value refers to the actual sum of money the policyholder will receive if the policy pays out. That means, what is the cash value of the policy? Enquire about the factors that affect this to determine which will be most beneficial to you and your family.

Conclusion

Investing in a lucrative pension plan is a proactive way to ensure that you and your family will be able to maintain the standard of living you’ve become accustomed to. Understanding the pension plan types makes it easy to build and grow a lucrative retirement corpus.

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