How Do I Choose and Decide the Right Retirement Plan?

It was raining. Hoshi was sitting at Kyani’s Restaurant and sipping on his hot, milky, sweet tea. He took a bite of his bun maska and smiled at Kayo. “Hey young man, what’s the problem? You look so worried.”

‘Uncle, it’s like this. My neighbor Jamshed Vakeel expired this morning…you have met him too, I think.”

“Oh, that’s sad. Of course, it was that flamboyant advertising guy with the British upbringing right? I had heard he had health problems,” said Hoshi, looking somber.

Kayo said it was expected that Jamshed would pass away soon, but then, “ What was shocking was that he had led a carefree lifestyle, had no savings to speak of and no pension either, since he had been a freelance consultant and not employed in any organization…so his family is in trouble now. So this has set me thinking about my future too. I’m also a freelance photographer with no pension option… I don’t want to depend on others to make my ends meet at a later stage.”

“Kayo, don’t worry. You are still in your early 30s. I suggest you opt for a Pension Plan to help you out in your retired life.”

“How do they wok? And how do I choose the correct one for me?,” Kayo was interested now.

What are Pension Plans?

Well, Pension plans are also known as retirement plans. These are investment plans that help you allocate some of your savings to accumulate over a period of time and provide you with steady income after retirement. A retirement plan is a crucial investment, considering the prevailing inflation rate. Plus, Savings get exhausted very fast and are sometimes used in emergencies. Selecting a good retirement plan helps you secure your cash flow for meeting basic daily needs after retirement. When you continuously invest in retirement plans, the amount grows over time, enhancing your final savings corpus. A right pension plan lets you plan for retirement in a phased manner. So it is good to choose a retirement plan that will be your strength in your silver years.

“So, how do I choose the correct Pension Plan for me?”, asked Kayo. Hoshi told him to look at the various features of a conventional retirement plan:

Features of Pension Plans

1. Minimum Guarantee: Every pension plan needs to have a minimum guarantee. As per IRDA guidelines, there should be “Non-zero returns” on all premiums or guaranteed maturity benefits. Most insurance companies guarantee a minimum of one percent of total premium over the complete policy term.
2. Tax Benefits: The final payout is provided in two ways. 33% of final pay out can be withdrawn in lump sum and is not taxable. But the rest of the amount is taxable.

Types of Retirement Plans

Retirement plans can be broadly divided under the following heads:

Deferred Annuity: A deferred annuity plan allows you to accumulate a corpus through regular premiums or single premium over a policy term. After the policy term is over, pension will begin. The advantages of deferred annuity plans include tax benefits. No tax is levied on the money that an individual invests in the plan unless he withdraws it. As deferred annuity plan can be bought by making one-time payment or by making regular contributions towards it.

Immediate Annuity: In an immediate annuity plan, pension begins immediately. One has to deposit a lump sum amount and pension will start instantly. Based on the lump-sum amount, the policyholder will invest at prevailing annuity rates, choosing from different annuity payout options. There are tax benefits on the premiums paid too, as per Indian Income Tax Rules. On the death of a policyholder, his/her nominee will be entitled to get money.

With Cover and Without Cover Pension Plans: The “with cover” pension plans have life cover component in the plan – on the death of the policyholder, a lump sum amount is paid to the family members. However, the cover amount is not very high since a good part of premium is diverted towards growing the corpus rather than covering for life risk. The “without cover” pension plan implies that there is no life cover. The corpus built till date (after deducting unpaid premium and other expenses) is given out to the nominee in case of the death of a policyholder. Currently, deferred annuity plans are “with cover” and immediate annuity plans are “without cover”.

Annuity Certain: As per this clause, annuity is paid to the annuitant for a specific number of years. The annuitant can choose the period and if he dies before exhausting all payments, annuity will be paid to beneficiary.

Guaranteed Period Annuity: As per this annuity option, annuity is given to the life assured for certain periods like 5,10,15 or 20 years, whether or not he survives that duration.

Life Annuity: As per this annuity option, pension amount will be paid to the annuitant until death. If annuitant chooses “with spouse” option, after the death of annuitant, pension will be paid to the spouse.

National Pension Scheme (NPS): The New Pension scheme introduced by the government invests your savings in equity and debt market as per your preference. You can withdraw 60% of amount at retirement and the balance 40% must be used to purchase annuity. The maturity amount is taxable.

Pension Funds: Owing to the low front load charges, pension funds are a good way to accumulate corpus amount. Pension funds are meant for long term and hence, they perform better.

Hoshi concluded, “So you see Kayo, there are many Pension Plan options. Retirement plans ensure your financial independency even when your source of income ceases to exist. So, it is wise to compare available pension plans to make an unbiased decision and choose a best plan. I shall put you on to my own insurance advisor. I am glad you are starting young!”