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You might be thinking of these questions very often like What will happen when I retire? My regular income would stop. How will I maintain my lifestyle and my family’s needs post-retirement? What do I need to live comfortably in my retirement years?
The simple answer to this question is an investment in pension plans.
Retirement or pension plans are a time-tested and reliable means of long-term investment that offer returns and flexibility. It also provides the option to withdraw a part of your corpus as a lump sum and invest the rest in other financial products. In this way you be guaranteed of a steady income stream for life and most important of all, it will give you the financial peace of mind in your retirement years.
To invest in a retirement plan, you must know what it means, what the fine print denotes and the financial terminology. You must understand the key terms associated with pension plans to get information on how to maximize your retirement corpus which could affect your financial future.
To make it easy, let’s discuss the common terms related to pension plans to help you make an informed purchase of a retirement policy
1. Pension Plan – An investment option for an income after retirement
A pension plan is any investment planning scheme that provides you with an income after retirement. At its most basic level, a pension is a tax-efficient savings plan that you cannot receive any benefits from until a minimum age of 50. Depending upon the type of policy you have, you could receive pension payments for a defined period of time, or for the length of your natural life.
Pension schemes can be provided by your employer, personal pension policies purchased through an insurance company, or via the state. In India, like in some countries, the term ‘Superannuation Fund’ is used as a substitute for a pension plan.
2. Premium – The amount you invest in a policy
In pension plans, as with all insurance policies, the premium is the amount invested towards a policy purchased from an insurance company. The premium is income for the insurance company, but it also represents a liability, in that the insurer must provide coverage for claims being made against the policy.
A ‘single premium policy’ requires a single lump-sum payment and one that remains invested for the length of the policy term. A ‘regular premium policy’ obliges you to make payment either annually, quarterly or monthly for the length of the policy term.
3. Riders – Additional features you can add to your plan
‘Riders’ are optional features or benefits you can choose to add to your pension plan at an additional cost. riders provide the option for you to expand coverage to meet your specific needs.
4. Beneficiary (or Nominee) – The person/persons who benefit from the policy you take
This refers to the person or persons who receive the Death Benefit in case of the demise of the policyholder. If the nominee is a minor at the time when the policy began, a guardian can be appointed until such time the nominee reaches maturity. You can also have multiple nominees and specify the share (%) each one of the nominees receives.
5. Accumulation Period – The time period of your pension plan
This is the length of time for which one invests in a pension plan of their choice. For example, if you purchase a plan that requires a monthly investment of Rs.10,000 over 30 years, the ‘term’ of 30 years is known as the ‘Investing Period’.
6. Vesting Age – The age at which you start receiving a pension
The age at which you start receiving a pension in an insurance-cum-pension plan is known as the ‘Vesting Age’. For most pension plans, the vesting age does not come into force until the annuitant is 55 years of age.
7. Fund Value – The amount due at the end of your investing period
The total amount due to you at the end of the agreed period of investment is known as the Fund Value. Depending on the type of pension plan you choose to invest in, some have a pre-defined fund value at the end of the investing period. For a pension plan that invests in the stock market, the fund value is the cumulative value of investments made on the day of the plan’s maturity.
8. Maturity Benefit – The amount you receive at the end of your investing period
The total amount you are eligible to receive following the end of the investing period is referred to as the ‘Maturity Benefit’. An alternative term for this is ‘Annuity Benefit’. In equity-linked pension plans, the higher value between the Fund Value and Guaranteed Maturity Benefit at the end of the investing period is the Maturity Benefit.
9. Loyalty Benefit – The amount an insured receives for keeping their plan through the investing period
The incentives given to the insured for keeping a policy in-force throughout the investing period is referred to as the ‘Loyalty Benefit’, provided your premium payments are on time and up-to-date. This benefit represents a portion of any monetary surpluses of the insurance company after valuation, which is shared with policyholders. This amount, usually a percentage of the sum assured.
Loyalty benefits are given only for each year for which premiums are paid and added to the sum assured.
10. Death Benefit – The amount a beneficiary receives
The amount payable on a pension plan, annuity or life insurance to the beneficiary of the policy when the insured passes away while the policy is still in force is known as the Death Benefit. All pension plans carry a Death Benefit, though the quantum and structure of the payment to the beneficiary is determined by the type of plan held at the time of policyholder’s demise. Payment to beneficiaries could be in the form of a lump sum, or as a continuation of monthly or annual payments paid directly to them.
11. Transfer Value – The amount you receive when all charges and penalties are deducted
The current investment value and projected future value of your pension plan are important to you, but the amount you receive when all charges and penalties have deducted must be seriously considered if you move your plan elsewhere. This will provide a more realistic representation of the current position of your pension plan.
12. Annuity – A type of insurance plan that entitles you to a series of annual sums
An ‘Annuity’ is a written agreement between you (the annuity owner) and the insurance company. In return for your premium contributions, the insurance company agrees to provide either a regular income, the right to withdraw up to a certain percentage per year, or even a lump sum payment at some future time.
Contributions made to a pension plan are exempt under Section 80CCC up to a maximum ceiling of Rs.1.5 lakh.
Before investing in pension plans, knowledge of these key terms will help you understand the features of various pension plans and also help you make an informed decision.
Unit Linked Insurance Products (ULIPs) are different from the traditional insurance products and are subject to the risk factors. The premium paid in the Unit Linked Life Insurance Policies is subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. Max Life Insurance is only the name of the insurance company and Forever Young Pension Plan(UIN: 104L075V03)is only the name of the unit-linked life insurance contract and does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these funds, their future prospects or returns. For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding a sale. The past performance of the funds does not indicate the future performance of the funds. You may be entitled to certain applicable tax benefits on your premiums and policy benefits. Please note all the tax benefits are subject to tax laws prevailing at the time of payment of premium or receipt of benefits by you. Tax benefits are subject to changes in tax laws.