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What is Pension?

Know how pension plans can make life after retirement better.

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Retirement is a time when you can finally relax and fulfill the long-awaited dreams. But it can also be a challenging time if you are unprepared for it. Hence, it is in your best interest to understand what is pension and its importance at an early stage in life. Doing so will give you more time to start planning for your retirement.

How Does Pension Work?

Pension is a kind of retirement income that you planned throughout your life to ensure an income source. It is an investment that grows through regular contributions. When you plan for your retirement at an early stage in life, it helps secure a sizeable fund.

In general, there are different ways in which pension plan functions. An individual's pension fund can be created by sharing the contributions between their employer and themselves. In such a case, the employer is usually responsible for the larger percentage of it.

Additionally, an individual can create a pension fund by depositing a certain amount into a pension plan. Upon retirement, the person will receive the payments as an annuity, depending on the chosen plan.

It is crucial to understand what is pension to calculate the investment amount appropriately. The main function of pension in life is to act as an income source. Hence, it must be adequate to cater to future financial requirements. Once you are familiar with what is pension, the next step is to know the different types of pension plan definition.

Types of Pension Plans

Most of us work hard for a good part of our lives to fulfill several responsibilities. We delay our personal goals to manage the expenses efficiently in the present. However, life after retirement is a time when you can focus on yourself.

It is precisely what is pension plan capable of doing if you plan carefully. It will give you the financial independence needed to live a comfortable life in the absence of an income source.  

The pension plan definition and relevance may differ for people from varying backgrounds. As per the 'Population Projections for India and States 2001 - 2026', India's share of the elderly population would increase to 12.4% by 2026[1]. A wide range of such pension plans are available in the market to accommodate them.

The distinction in what is pension for diverse financial profiles is why we have plans with different structures and benefits. These plans may vary in terms of payout time, the nature of the investment, and annuity. Depending on your particular demands, you can look for the relevant pension information.  

Options to Build Pension Fund

Having discussed the importance of securing a retirement fund, you can proceed to explore the options available. Not many of us may know about what is pension scheme and the possibilities that it entails.

Here are some of the options that will help understand what is pension scheme with different frameworks:

1. Deferred Annuity

A deferred annuity plan helps create a corpus within a specific policy term through a single or regular premium payment. After completing the policy term, you receive the amount as a pension. It also provides the benefit of tax exemption and the option of making a lump-sum payment or periodical contributions.

Also Read: What is Annuity?

2. Immediate Annuity

With an immediate annuity plan, you can get the pension immediately. It requires a lump-sum payment, which is eligible for tax exemption. Here, the nominee receives the payout in the event of the insured's demise during the policy tenure.

3. Annuity Certain

The pension plan definition for Annuity Certain refers to a policy that offers payment for a specific number of years. It is up to the policyholder to choose the period for which they will receive the pension. In case of an unfortunate incident within the policy term resulting in the insured's demise, the remaining amount will benefit the beneficiary.

4. Pension Plan with Life Cover

A pension plan with life cover gives the dual benefit of investment and life insurance. The policyholder's family members are entitled to a lump-sum payment if the policyholder passes away within the policy duration. Notably, the payable amount may not be enough since most of the premiums for the policy are utilized to build the pension corpus for the insured.

5. Guaranteed Period Annuity

The Guaranteed period annuity provides the pension amount to the policyholder for particular periods such as 5, 10, 15, or 20 years. The payment is not dependent on the survival of the insured throughout the policy term.

6. Life Annuity

The life annuity option allows the policyholder to receive a pension until they pass away. If the plan has the "with spouse" option, the policyholder's spouse keeps receiving the amount after their demise.  

7. National Pension Schemes (NPS)

The government of India offers National Pension Scheme to protect the financial future of senior citizens. The investment in these schemes is divided into equity and debt funds, per the policyholder's preference. The policyholder can withdraw 60% of the generated returns on investment upon retiring, and the rest can be used to purchase the annuity.

6. Life Annuity

The life annuity option allows the policyholder to receive a pension until they pass away. If the plan has the "with spouse" option, the policyholder's spouse keeps receiving the amount after their demise.  

7. National Pension Schemes (NPS)

The government of India offers National Pension Scheme to protect the financial future of senior citizens. The investment in these schemes is divided into equity and debt funds, per the policyholder's preference. The policyholder can withdraw 60% of the generated returns on investment upon retiring, and the rest can be used to purchase the annuity.

8. Pension Funds

As the policyholder, you need to invest a fixed amount in a pension fund of your choice for a specific duration. With time, the fund value increases, and so does the returns on your investment. It is up to you to withdraw the amount as a whole, continue the investment or make it a regular income source upon retirement.

How to Choose the Best Retirement and Pension Plan?

Once you start earning, it is never too early to prepare for retirement. You can begin by reviewing the pension information for different schemes. It may give you a better idea of the requirements for life after retirement. Proper planning also provides time for your investments to grow and yield better results.

Therefore, it is vital to recognize what is pension scheme and the options available to make an informed decision. It is also crucial to understand what is pension has different implications for each of us. 

How to Choose the Best Retirement and Pension Plan?

Once you start earning, it is never too early to prepare for retirement. You can begin by reviewing the pension information for different schemes. It may give you a better idea of the requirements for life after retirement. Proper planning also provides time for your investments to grow and yield better results.

Therefore, it is vital to recognize what is pension scheme and the options available to make an informed decision. It is also crucial to understand what is pension has different implications for each of us. 

Let's discuss the things you should remember when determining the best retirement plan per the pension information.

1. Consider Your Expenses

It is an essential part of retirement planning to map your future expenses. It includes your monthly and other significant costs that need to be covered with the income source. You must also factor in the medical treatment costs since you are likely to be more vulnerable to health issues at an older age.

2. Impact of Inflation

The amount of money that you invest today needs to be planned according to its expected value in the future. The returns from the investment should be sufficient to carry out regular activities at least.

It should allow you to maintain a desired standard of living once you stop earning. When looking for the right policy, remember to check if the pension plan features are aligned with your crucial financial goals.

3. Debt Repayment

A significant portion of your earnings may go into repayment of any outstanding debts. You must consider if the duration of these debts extends to life after retirement. Using a retirement calculator can make it easier for you to plan your finances.

4. Policy Features

Understanding what is pension plan and its implications on your life can be challenging at a younger age. However, it is helpful to be aware of the pension information as it gives you a better picture of life after retirement. If you are not aware of the different policy features, it is harder to envision a life without any parameters of saving for it. 

Frequently Asked Questions (FAQs) 

Q. What is an Annuity?

A. It is an insurance product that offers a fixed stream of income to the policyholder regularly. The frequency of annuity payment may be on a monthly, quarterly, half-yearly, or yearly basis.

Q. What is Provident Fund?

A. A provident fund (PF) is a savings scheme for retirement, managed by the government. They grow with monthly contributions, which accumulate over time and can comprise a retirement fund. There are further classifications to a provident fund, depending on the nature of employment.

Q. What is the Employee Provident Fund? 

A. An Employee Provident Fund (EPF) is a pension fund where the employer and employee regularly make contributions. The employer is entitled to receive the lump sum amount upon retiring, which includes both contributions with interest.

Q. Do I need a pension plan if I have a PF?

A. As important as it is to save money for retirement in the present, it may not be sufficient in the future due to the effects of inflation. Therefore, comprehensive retirement planning is required to live a comfortable life.

Q. How is a pension plan different from a term plan?

A. A term plan is essential for your family member's financial protection in your absence. It is a safety net for unforeseen circumstances. On the other hand, a pension plan ensures that your life after retirement will be financially secure. The maturity benefits are different for both as well.

Sources:

[1] https://www.pfrda.org.in/writereaddata/links/crisil pfrda report869bc61d-a231-42de-a77c-ff614b0af650.pdf

https://pensionersportal.gov.in/

https://www.india.gov.in/spotlight/national-pension-system-retirement-plan-all

https://www.epfindia.gov.in/

 

ARN: May21/Bg/25B