As the name suggests is a plan that provides you pension when your retired life begins. It provides annuities during your old age, out of the amount that you save while you are in earning or in accumulation phase. In short, you are able to financially secure your old age through a pension plan. Since it is provided by insurance companies, it gives you dual benefit of financial security during old age as well as insurance benefits.
When you invest in a pension plan provided by an insurance company, you save aside a small amount regularly say, monthly, quarterly or annually for a specific number of years. The number of years chosen by you depends upon your age at which you start accumulating.
The plan is generally bought with a long-term horizon but there are people who like to invest lump sum and receive annuities or return immediately. Therefore, it is categorized in two types, deferred annuity plans and immediate annuity plans. In deferred annuity plan, you choose to accumulate funds for a number of years during which you pay the premium. Once your accumulation phase is over and vesting date arrives, you start getting your returns in form of annuity.
In immediate annuity plans, there is no accumulation phase as you invest lump sum and start getting annuities immediately. We can categorize the pension plan further on the basis of the time period for which it is bought for.
Lifetime annuity: You receive a fixed amount of annuities for a lifetime period. In case of your unfortunate demise, your nominee receives the purchase price plus bonus accumulated on it, if applicable.
Guaranteed period annuity: This plan provides annuities for a guaranteed number of years that you choose while buying the plan. In case, the insured is suffering, the nominee receives the payment. In case, the insured continues living, he keeps receiving the annuities for the rest of his life.
Annuity certain: Annuities are received by the insured for a determined number of years. In case of insured’s death, annuities are received by the nominee till maturity.
Joint life/Last survivor annuity: The insured receives annuities, in case he dies, his nominee or joint life continues to receive annuities for the lifetime period.
• It provides financial security during retirement period
• It helps investing the savings for old age in a planned manner
• It brings your focus to savings and assists in budgeting
• It provides life cover
• It supports you to grow your money through bonus and returns on your investment
• It helps you to save tax legally
• It helps you to financially plan for your old age events
• It lets you withdraw one-third part of funds when the vesting age begins and allows you to receive the rest as annuities
• A pension plan should be bought when you start earning, it lets you save small amounts for a longer period of time, which is easy and does not put any pressure on your to save
• To determine the number of years to invest in a pension plan, deduct your current age from retirement age.
• In case you choose to invest during your middle age say, 30’s or 40’s, do not stick to smaller amount of savings. Instead save according to the total funds you would like to have at vesting date.
• Before buying the pension plan add up your old age financial needs and increase the amount by multiplying it with the average rate of inflation and number of years for which you want to invest for.
• Go for online pension plans as they can reap you a maximum of 30% discount.
• Do check the add-ons available with each kind of pension plan. These are the additional benefits which can increase the value of your investment by many folds.
• Insurance companies also offer the life insurance add-ons or health insurance add-ons with your regular pension plan. Examine their cost and benefits. Buy them separately if they increase the premium amount of your pension plan unnecessarily.
• Do not hide important information from the insurance company while buying the plan. It will help you to choose not just the best pension plan for you but give you peace of mind as well that you have chosen the right way to secure your old age life.
As the name suggests the intent of the plan is to provide regular income post retirement as most of us work in private organization hence, not supported financially after retirement. A proper planning of pension amount is required to ensure that lifestyle doesn't fall too much after one stops working.
Easier way to understand is that one can save systematically during his earning period (accumulation phase) to build a corpus till he/she reaches retirement roughly around the age of 60. This systematic saving is invested by experts in instruments duly approved by regulatory bodies like IRDA so that better returns are generated till retirement age is reached. Now annuity period begins when the retirement age (here also known as vesting age decided by applicant) is reached, applicant has an option to take out (commutation) a maximum of 33% Tax Free and leave the remaining to be converted into equated monthly payouts, similar to pension. It is not difficult to understand that the bigger the premium paid today, the bigger will be the corpus created at retirement and bigger will be the pension amount.
Pension plan and life insurance plan, both are the products offered by insurance companies, therefore they both provide insurance. However, the way insurance benefits are provided, is different.
A pension plan assists financially when the plan holder is retired or no longer working whereas a life insurance policy provides protection to the family members when the bread earner is not around.
The period during which the pension plan holder accumulates the fund with the insurance company in form of regular premiums, is called as an accumulation phase.
It is the installment that is received by the pension plan holder from his accumulated reserves, on regular basis, once his retirement period starts.
A traditional pension plan is the one in which the plan holder is guaranteed to receive fixed return on his investment that he made for a particular number of years. Though he can avail one-third of the total receivable amount at the maturity but the rest is received by him in equal portions regularly on monthly, quarterly or annual basis.
A unit-linked pension plan provides the opportunity to the plan holder to invest in market-linked instruments during his accumulation phase. This allows him to receive the return on it according to the market conditions. His funds accumulate as per his choice of investment.