Pension plans or retirement plans are insurance + investment plans that help an individual create a corpus for their own future, over a period of time (policy term). On maturity (retirement), a third of the accumulated corpus can be withdrawn as a lump sum and the rest in parts in the form of a pension. The regular payout portion is called an annuity. The payout frequency can be monthly / quarterly / half-yearly or annual. In the event of the policyholder’s death anytime during the policy term, the nominee receives the lump sum amount as promised at the time of purchasing the policy. 

With a pension plan you can get a regular income post retirement, which is a great way of becoming financially independent.

Retirement plans can be classified in 3 ways:

Nature of investment

Investment plans - In this plan, you pay regular premiums which are invested in both equity and debt instruments. You can choose from fund options based on your financial risk appetite 

Savings plan – These plans that do not invest in the market. You pay regular premiums and at the end of the policy term, you receive pay-outs with a regular frequency. Additionally, you receive any earned bonus. 

Time when the payout starts

Immediate – You can pay a one-time premium and opt for immediate annuity that continues throughout your life

At a fixed time in the future - You can choose to receive payouts starting at a date in the future (say your retirement). 

Type of Annuity Plans:-

Single Life with return of premium – You will receive income throughout your life and on your death, nominee will receive the amount invested as an annuity.

Single Life without return of premium – You will receive income throughout your life. 

Joint Life with return of premium – You and your spouse will continue to receive income till either of you is alive. Nominee will receive the amount invested in annuity, post death of second life.

Joint Life without return of premium – You and your spouse will continue to get income throughout life.

With inflation and the ever-increasing costs of living and health-care your PF corpus will not be sufficient for meeting your retirement needs. As a thumb rule, the corpus that a person needs for a financially independent retirement (assuming retirement age to be 58-60) is 100 time of the last drawn monthly salary. However one should do a proper calculation before starting on this journey. Use a retirement calculator to ascertain the inflation-adjusted amount you will need for ensuring a comfortable retirement. Being market linked, retirement plans can give good returns over a long policy term and help you save enough money to lead a comfortable life.

Every individual needs to plan for his/her retirement. Earlier people used to spend 20-25 years in the retirement phase. However, because of people seeking early retirement and with increased life expectancy, the retirement phase has increased to 30-35 years. With increasing costs of lifestyle, medicines, and healthcare, the corpus required for ensuring a financially independent retirement, becomes quite huge. During your earning years, you are also working towards fulfilling your dreams like buying a new car, house and meeting responsibilities like children’s education. Therefore it is important to start early even if it means starting small. Retirement plans offer a disciplined and secure method of saving money to safeguard your future. Starting early on this journey will help you build a significant corpus for meeting your future needs.

Corpus required at retirement - The first step is estimating the amount of money you will need to fulfill dreams of a good post-retirement life. It is important to account for all sources of funds like your PF and having a sufficient outlay for any medical contingencies. 

Fund options – Most pension policies offer multiple fund options with varying degrees of risk (equity-debt allocation). Based on your financial risk appetite and investment tenure, choose the fund that meets your requirements. Equities should be given a particular place in your pension planning, as the returns in the longer term are generally better than other asset classes.

Flexibility – As pension schemes are long-term investments and personal, financial and economic circumstances will certainly change over the policy period, your plan should offer the choice to choose the type of investment suited to your financial risk appetite and the option to switch between funds as your outlook towards risk changes. 

Additional features - A retirement plan can have the option to purchase additional life cover for your spouse. An ideal retirement solution should also provide you the option of increasing your savings in a systematic manner.