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Planning for life after retirement is one of the central focuses of any holistic personal finance plan. But, unfortunately, providing sufficient financial stability to ensure one's relaxed and comfortable post-retirement life is often wrongly overlooked, ignored, or procrastinated. This may be because of the whirlwind of misinformation surrounding retirement solutions like annuity plans and pension plans! This article aims to demystify retirement planning with seven simple reasons to get an old-age pension plan without delay!
But before that, let us look at what pension plans mean! Pension plans fall under the umbrella of retirement solutions. These plans require the insured to contribute to the plan in a phased manner to receive a regular payout in their post-retirement days. There are a slew of benefits of having a pension plan for retired persons. Some of them are mentioned here:
Post-retirement, one's regular salary/business income stops, but their lifestyle needs to be maintained at the same level. This would require a steady flow of income through another source! To sustain the same comfortable lifestyle and provision for increased medical and healthcare expenses with growing age, one must plan their post-retirement cash flow prudently. Luckily, this is possible with pension plans in India!
Retirement solutions are relatively flexible and allow withdrawals even in the contributory phase. This means that these plans offer liquidity. Therefore, one need not worry about funds being locked up and can rest assured that they can withdraw funds from their retirement plan corpus in case of any emergency.
Being an insurance solution, most pension plans include a death benefit, that is, the monetary payout to the nominee of the insured person, in case of the latter's unfortunate, untimely demise. This means that the insured is guaranteed steady cash flow post-retirement and a lump-sum payout in case of untimely death.
Pension plans in India have tax benefits to the extent of ₹ 1.5 lakh every year. For a simple illustration, someone earning ₹ 15 lakh per annum and contributing ₹ 1.5 lakh towards life insurance (or pension plans) would lower their taxable income to that extent. So, their taxable income would now be ₹ 13.5 lakh!
Retirement solutions consist of two critical periods:
The contributory phase and the repayment period. Let's understand each one in detail.
The contributory phase is the duration in which the insured makes monetary contributions towards their retirement plan. These contributions may be monthly, semi-annually, or annually. Most pension plans in India allow the insured to choose how long they would like to contribute.
Retirement solutions encompass an essential feature called repayment period, the number of years for which the insured receives a pension. Most pension plans in India allow the insured flexibility in terms of choosing their repayment period.
Pension plans ensure that one can spend their silver days pursuing their passion rather than worrying about meeting expenses. However, people must start planning for this well in advance in their hay-days to reap the benefits later in life.
Pension plans fall into the lowest category of investment risk, as these are guaranteed1 products that are not linked to market returns in any way. Moreover, the contribution and the payout are cast in stone and do not change, irrespective of inflation, currency fluctuation, stock market moves, etc. Hence, these plans are beneficial for investors with a low-risk appetite.
An annuity can be broadly classified into two categories:
Immediate annuity: These plans require one to make a single or lump-sum contribution and start receiving payout immediately. Being life insurance products, they also encompass death benefits. There are a few available options under immediate annuity:
Life annuity: The amount is paid out till the insured person is alive. However, one may choose to continue their pension payout to their spouse also.
Guaranteed1 period annuity: The payout is made for a pre-decided time, as chosen by the insured. These payouts are agnostic of the survival of the insured.
To get a deeper insight into an annuity plan's benefits, check out the Tata AIA Smart Annuity Plan (UIN-110N150V05)
Deferred annuity: Under these plans, the insured contributes towards the plan either in a lump sum or via regular premium payments. The payout begins when the policy term is completed.
For more insight, check out the Tata AIA Guaranteed Monthly Income Plan (UIN-110N147V02)
When comparing pension products, a handy measure to find the most lucrative one is the present value of an annuity, which means discounting all future cash flows in current terms with a standard discount rate and comparing it across plans.
1) Early is better: The earlier one starts planning for retirement, the more extended contribution period they can opt for, which means they can enjoy a more significant payout on retirement.
2) Not an isolated product: Pension plans cannot be viewed in isolation but rather in the larger context of holistic financial planning. Retirement is only one aspect and must be carefully woven into an individual's financial plan.
3) Avoid being penny wise, pound foolish: While choosing ANY insurance product, people make a common mistake to opt for the plan with the lowest charges. There are several other features, benefits, limitations, and nuances revolving around each product, and we must carefully analyze these on a case-by-case basis before making a purchase decision!
4) Stick to Quality: Being guaranteed1 income plans, the only risk that can haunt investors is the survival of the pension provider. Hence, it is best to do a thorough background check on the company's pedigree before entering any arrangement.
5) Free-look period: As per IRDA norms, insurance products come with a free-look period; that is, one can claim a full refund of premium, up to a specific date, if they feel that the product that they purchased is not suitable for them. Not many investors are aware of this feature and end up settling for unsuitable products.
6) Married Women's Property Act of 1874: This ring-fences the proceeds of a life insurance policy received by the widow of the insured in case of the latter's untimely death. It protects the said proceeds against being attached to the deceased's possessions in conflict and claimants and ensures that the money only goes to the widowed woman. It is a handy feature that provides the smooth transmission of insurance amounts to the widow.
Pension plans offer the perfect blend of investment and insurance and are the ideal retirement solution and a must-own in any robust financial plan. Tata AIA Life Insurance Company Ltd offers some of the most efficient retirement solutions that you can check out here!
Stay insured, stay safe!
What are the two types of pension plans?
What are the benefits of a pension plan?
How do I choose a pension plan for retirement?
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Insurance cover is available under the product.
The products are underwritten by Tata AIA Life Insurance Company Ltd.
The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.
For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
*Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
1Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry