Pension Funds

Pension Plans

1. What are pension plans?

Pension plans are also known as retirement plans. In this, you may invest some portion of your income into the designated plan. The main objective behind a pension plan is to have a regular income post-retirement. Considering the ever-growing inflation, investing in these plans has become necessary. Even if you have considerable savings in your bank account, still you may need one. It is because savings usually get spent in meeting contingent needs. So, the best pension plan will support you when all other income streams cease to exist.

In India, pension plans have two stages – the accumulation stage and the vesting stage. In the former, the investors pay annual premiums until they attain the age of retirement. On reaching the retirement age; the second stage, the vesting stage begins. During this stage of the pension plan, the retiree will start receiving annuities until their death or the death of their nominee.

2. What are the tax implications of pension plans?

The contributions that are made to a pension plan, under Section 80CCC, are tax-exempt up to a maximum ceiling of Rs 1.5 lakh. The contributions include the amount spent on buying a new pension plan or renewing an existing plan of similar nature. Both residents and non-residents may claim tax deductions which are offered by this section. However, Hindu Undivided Family is not eligible to make such claims under the given section.

The withdrawals, however, are not tax-free. Only one-third of the corpus that is distributed to the retiree (soon after reaching the retirement age) by the pension plan is tax-free. The rest of the money is distributed as an annuity and is subject to taxation depending on the retiree’s tax rate at the time of retirement.

3. What are the different types of pension plans available in India?

There are different kinds of pension plans which you can check below:

Plans that are sponsored by an insurer where the investment is solely in debt and are best suited for conservative investors.
Plans that are unit-linked and invest in both equity and debt.
The National Pension Scheme, which invests either 100% in government securities, 100% in debt securities (other than government securities), or a maximum of 75% in equity.

There is no doubt that pension plans are a much safer form of investment with multiple classifications, which are based on the benefits of the plan and its structure.

4. How are the various plans classified?

The classification of pension funds can be based on the following:

a. National Pension Scheme

The Government of India introduced a new Pension Scheme for people who wanted to build up their pension amount. With the scheme, your savings will be invested in debt and equity market, based on your preference. It allows you to withdraw 60% of the funds at the time of retirement and the remaining 40% is used for the purchase of the annuity. The maturity amount is tax-free.

b. Deferred Annuity

With the deferred annuity plan, you can accumulate a corpus through a single premium or regular premiums over the term of the policy. The pension begins once the policy term gets over. This deferred annuity plan has tax benefits wherein no tax is charged on the money invested until you plan to withdraw it. This scheme can be bought by either making regular contributions, or by a one-time payment. This way, it works for you whether you want to invest the entire amount at one time or want to invest systematically.

c. Pension Funds

The government body, Pension Fund Regulatory and Development Authority (PFRDA), has authorised six companies to operate as fund managers. These plans offer comparatively better returns at the time of maturity and remain in force for a substantial amount of time.

d. Immediate Annuity

In this type of scheme, the pension begins right away. As soon as you deposit a lump sum amount, your pension starts. This is based on the amount the policyholder invests. You can choose from a range of annuity options. Under the Income Tax Act of 1961, the premiums of the immediate annuity plans are tax exempt. Post the death of the policyholder, and it is the nominee who is entitled to the money.

e. Guaranteed Period Annuity

Regardless of whether the holder survives the duration, this annuity option is given for periods such as five years, ten, fifteen, and twenty years.

f. Pension Plans with and without cover

Pension plans with cover include life cover, which means that at the death of the policyholder, the family members are paid a lump sum amount. This amount may not be considerable. The without-cover plan as the name suggests does not have life cover. If the policyholder passes away, then the nominee gets the corpus. At present, the immediate annuity plans are without protection, while the deferred plans are with cover.

g. Annuity certain

In this scheme, the annuitant is paid the annuity for a certain number of years. The annuitant can pick this period, and in case of their death, the beneficiary receives the annuity.

h. Life Annuity

The life annuity scheme pays the annuity amount to the annuitant until the time of death. If the annuitant dies and they had chosen the option ‘with spouse’, then the spouse receives the pension amount.

Want to know more about which pension fund to invest in? Contact us to choose from a list of hand-picked funds that are curated to suit your finances.

5. What are the advantages of pension plans?

Some of the advantages of investing in Pension Plans are listed below:

a. Option in Investment

Pension funds give investors the option to invest in either the safe government securities or take some risk and invest in debt and equity investments depending on their risk profile. The risk is balanced by the prospect of higher returns that are generated by the investment.

b. Long-term savings

These plans serve as a long-term savings scheme regardless of whether you opt for a lump sum payments or multiple payments of small amounts, the savings is assured. Pension plans create an annuity which can be invested further and give rise to a steady flow of cash post your retirement.

c. Choose how you want to get paid

Depending on your age or what your plans are, you can either invest a lump sum amount and get annuity payments right away, or choose a deferred annuity plan which will let your corpus earn more interest until the payouts begin.

d. Works as a life insurance cover

There are pension plans that offer the investor a lump sum amount when they retire or in case of the death of the individual, whichever scenario occurs earlier. This means that your pension policy also serves as a life insurance cover.

e. Negates the effect of Inflation

It is an excellent way of negating the effect of inflation by investing in pension plans. These plans pay a lump sum during your retirement, which amounts to a maximum of one-third of the accumulated corpus and the remaining two-thirds of the corpus is used in generating a steady cash flow.

f. Access a lump sum amount during an emergency

You are allowed to make adjustments to your pension policy to access a lump sum payout in case of an emergency. This can be done to cover one’s long-term health care.

6. What are the disadvantages of pension plans?

a. Limited amount of deduction allowed

Though pension plans qualify you to a tax deduction, the maximum allowed deduction on life insurance premiums is Rs 1.5 lakh under the Income Tax Act, 1961.

b. Taxation on the annuity

When you receive the annuity after your retirement, it is taxable as on that date.

c. High returns require high-risk taking

To make sure that the payout at the time of your retirement is adequate, you may have to seek high-risk options to obtain higher returns. The traditional non-risky investment options may not be enough to override the effects of inflation.

d. Best suited for early investors

If you are not an early investor, then this investment option may be a little late for you. As the returns earned by someone who invests at age 21 as opposed to someone aged 30 or 35 years, will get a substantially more significant return.

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