Types of Pension Plans In India

 

Financial independence post-retirement is paramount. Prudent investments made while you have a regular income can make the golden years of your life enjoyable. With financial freedom it is possible to do things one is passionate about, spending time with loved ones without the worry of finances. Read on for the various types of pension plans in India and choose the pension plan to suit your financial and retirement goals and needs.

What Are Pension Plans?

Pension plans are a part of retirement planning that provides the benefit of life cover as well as investment. It not only makes your retired life financially independent but also will be a financial safety net for your family in your absence. 

The post-retirement financial needs differ from individual to individual, and so does the financial planning. It depends on the lifestyle, number of dependents, and financial goals. Various types of pension plans are designed to suit different requirements. You can choose a pension plan that meets your needs and can be adjusted as per your financial goals.

List of Different Pension Plans In India

Planning for retirement early in life is a prudent step taken for a peaceful and financially secure post-retirement life. The financial planning depends on the risk appetite, time horizons, and the financial goals. Different types of pension funds are available to align with individual goals and needs. 

1. Deferred Annuity

This is a life insurance plan that provides a fixed income at a future date of your choice. This is one of the retirement plansbest suited for salaried individuals as it has flexible premium payment options. If you have a lump-sum amount, you can pay a single premium and get a fixed income after a waiting period, i.e., the deferment period. This is one of the most popular types of retirement plan. The premiums paid under the plan are eligible for tax benefits under Section 80C.

2. Immediate Annuity

Immediate Annuity is one of the basic annuity plans. Among the types of pension plans, this plan suits individuals who can invest a lump-sum amount for a fixed post-retirement income.The contribution made is converted into a guaranteed stream of income for a minimum period of 5 years or a lifetime. The withdrawals begin one year after the date of investing in the plan.

If you have already paid tax on the funds invested in the immediate annuity plan, the fixed income generated will be partially tax-free.

3. National Pension Scheme

The NPS is a scheme introduced by the Central Government for financial security in the future by way of post-retirement income. Public, private and unorganised sector employees are eligible to invest in the scheme. They can contribute a defined amount during their earnings to be financially independent on retirement. 

The subscriber can, on exit from the scheme, reinvest a part of the accumulated retirement fund in life annuity from a Pension Fund Regulatory & Development Authority (PFRDA)empanelled insurer and withdraw the rest of the amount. The National Pension Scheme is one of the best types of pension funds with several other benefits. It is cost-effective and gives the option of both investment and pension funds. 

The investments under the scheme are eligible for tax benefits up to Rs. 1.50 lacs under Section 80C and an additional Rs. 50000/- under Section 80CCD(1B).

4. Public Provident Fund (PPF)

This is among the types of pension plans that are most preferred due to their investor-friendly features. It is a long-term investment plan with a tenure of 15 years. The option of either making a lump sum deposit or creating a maximum of 12 instalments in a financial year is available. The minimum deposit is Rs. 500/- and the maximum is Rs. 1.50 lacs in a financial year. Public Provident Fund is a government-backed investment option, and individuals with low-risk appetite consider this to be one of the ideal types of retirement plan. PPF provides EEE tax benefits, which means the principal, interest, and maturity proceeds are all tax-free. The pension fund can be extended for a further period of 5 years on maturity. A loan facility is available from the 3rd year till the 6th year from the date of opening the account.

5. Atal Pension Yojana

Atal Pension Yojana is one of the unique types of pension plans designed mainly for the unorganised sector. Under this yojana, a guaranteed pension of Rs. 1000 to Rs. 5000, depending on the contribution, will be provided to the subscriber every month upon attaining 60 years of age. 

6. Employees Provident Fund

Employees’ Provident Fund (EPF) is among the popular types of pension plans for salaried employees. A monthly contribution of 12% of their salary (basic plus DA) and an equal contribution from the employer will create a sound retirement corpus. On retirement, you can convert the corpus into a pension for life or withdraw in lump-sum. A loan facility is also available in case of emergencies. 

7. Retirement-Focused Mutual Fund Schemes

Apart from the types of pension plans with a fixed income, individuals can explore retirement-focused mutual fund schemes that provide both liquidity and tax benefits. Individuals with a risk appetite can invest in these mutual funds as they provide market-linked returns. The lock-in period depends on the scheme you decide to invest in. 

8. Annuity Plans

Individuals who intend guaranteed returns post-retirement, along with a financial safety net for their family, will opt for annuity plans and other types of pension plans. Various options like a single annuity, joint annuity and an annuity with returns of purchase price are available to suit individual preferences. Flexibility to pay a regular premium or a single premium is also offered. 

The choice of receiving monthly, quarterly, half-yearly, or yearly income is also provided. Invest in annuity plans that are considered the best types of retirement plan for a guaranteed income for a lifetime.  The premiums paid are eligible for tax benefits under 80C. However, the annuity income is taxable as per your income tax slab.

9. Pension Plans With Life Cover

The most preferred types of pension plans are plans with life cover. These plans involve two components, i.e., the investment component and the insurance component. A part of the premium is invested in the market, and the rest goes towards life cover. The primary object of these types of pension funds is to provide a sustainable pension to cover the monthly expenses on retirement. They also serve as a financial safety net for the family in case of the demise of the policyholder during the policy term.

Who Should Consider Buying A Pension Plan?

A pension plan allows everyone to have a financially secure and independent life after retirement. Financial planning in your 20s is the best time for investment in different types of pension plans. Pension plans provide tax benefits under Section 80C of the Income Tax Act 1961 up to Rs.1.50 lacs. You should choose the pension plan depending on the age at which you wish to retire and your financial needs post-retirement.

How To Choose The Best Pension Plan?

With different types of pension plans available, it can be overwhelming when it comes to choosing the best plan. Keep in mind the following aspects while investing in a pension plan:

1. Consider your financial goals, decide your retirement age, and assess the monthly income you need after retirement.

2. Your present income and the fixed income you need after retirement are the factors that decide the investment required.

3. Do market research and go for a plan that aligns with your financial goals and affordability.

4. Read the terms and conditions to understand if the plan suits your requirements.

5. Do not go by recommendations from others. Your financial goals are different from theirs.

Things To Consider While Buying A Pension Plan

The features that you have to look into while buying a pension plan are:

• The premium to be paid and the annuity provided are the critical aspects to consider. Decide on a deferred annuity or immediate annuity, depending on when the annuity should start. 

• Check the method of sum assured calculation and find out if the sum assured will be enough to meet your financial goals.

• Consider the premium payment period and ensure that it ends before you retire.

• The annuity start period and the period for which the annuity will continue should be per your financial goals.

• Check the surrender condition, i.e., the amount you get if you surrender the policy before the maturity period.

How Much Should You Invest In A Pension Plan?

Your investment in any of the different types of pension plans in India depends on what you are investing in. If you are investing for a fixed income after retirement, consider the following:

• Your Age

• The type of annuity plan

• The term of the annuity plan

• Life cover

• Insurance Riders

If you are investing for a retirement corpus, then consider the following:

• Starting Age

• Type of Plan

• Life Cover amount

• Maturity Age

• Tax saving limits

Conclusion

Financial planning for a peaceful retired life is crucial. Choose from the various types of pension plans to align with your income, retirement age, and goals and invest now if you have not already. 

FAQs on types of pension plans

Q. Which are the 3 pension plans that are generally preferred?

Defined contribution pension plans like EPF, PPF, and NPS are 3 most preferred types of pension plans in India.

Q. Which is the best pension scheme?

The grading of the pension scheme depends on each one’s financial goals. However, for salaried individuals, defined contribution pensions like EPF, PPF, and NPS are the best.

Q. What are the four main pension plans available in India?

The main types of pension plans in India are:

• Deferred Annuity

• Immediate Annuity

• Life Annuity

• Pension Plan with Life Cover

Q. Are pension plans eligible for tax benefits?

The contributions made towards most pension plans are eligible for tax benefits under Section 80C of the Income Tax Act 1961.