Retirement is the golden period for many. It is a time where most can spend days with their loved ones, indulge in their hobbies, and put themselves first. But to do that, one has to be prudent during their working years and have a clear and actionable financial plan.

Without saving and investing in pension plans in India or any annuity plan, it is impossible to build a reserve for your golden years. For a stress-free retired life, it is vital to start planning and growing your wealth early on. Here is why boosting your wealth through investing in retirement-centric plans is vital.

What is a pension plan? How does it work?

A pension plan is a financial plan that gives a fixed retirement income to policyholder or the person nominated under it. They can either be market-linked or non-linked. Market-linked pension plans give returns based on the fund’s performance in the equity and debt investment market. Non-linked plans are those whose returns are independent of any market fluctuations.

The returns in market-linked pension plans are variable and not guaranteed¹. In non-linked pension plans, they are fixed and guaranteed¹. They are as per the interest rates set by the Insurance Regulatory and Development Authority of India (IRDAI).

Pension or annuity pension plans work in a simple way. The buyer invests a specific sum of money into the pension plan and gets fixed periodic returns during their lifetime post-retirement.

Why are pension plans important?

As pension plans provide a steady source of income to retired individuals in their golden years, they are a vital component in establishing stability and security in one’s post-working life. They help you fulfil goals, settle unforeseen expenses, and indulge in long-awaited luxuries such as:

• Going on a vacation
• Getting premier healthcare services
• Going on a pilgrimage or any event
  
• Engaging in enjoyable activities/ hobbies
• Paying day-to-day utility expenses

They are also important as they negate the effect of inflation and grow your wealth as per the current value of money. Inflation is the continuous rise in the price of goods and services. While the price of things shoots up, the value of the rupee stays the same. This means what cost you lesser now might cost you 10 to 20 times more later. Without a pension plan, your funds will remain stagnant and will not suffice 20 to 30 years down the line.

Here is a scenario where Ms Naina decides to save a monthly sum of ₹20,000 in a fixed deposit for 10 years and Ms. Nidhi utilizes a pension plan to save the same amount of money over the same period. By the time they both retire, it is observed that Ms Nidhi has a better retirement corpus than Ms Naina.

The reason for this is simple; even though Ms Naina’s bank offered her more interest rate on her fixed deposit, Ms Nidhi not only earned returns on her corpus until retirement but also continued getting the returns along with her pension income after retiring.

In a way, Ms Naina’s funds did not appreciate as much as Ms Nidhi’s funds did. This is what makes pension plans ideal for providing a healthy source of income during the golden years.

Is it good to invest in a pension plan?

 

It is crucial to be prompt in searching for pension plans like annuity pension plans and getting one early on in life. This is because the age of the annuitant plays an essential role in deciding the purchase price one has to pay and the magnitude of the annuity payouts he/ she is eligible to receive.

Moreover, for an investment to reap considerable benefits, it is vital to let the effect of compounding take its time and unleash its magic. Putting in a small amount but starting early in your investment journey still helps you reap more profits than putting in a big amount but starting at a later stage of life.

To understand this better, let’s take a look at how 32-year-old Ms Dia invests in a pension plan to get a monthly pension of ₹30,000 per month after her retirement at 60 years. Let’s assume that Dia’s monthly disposable income is ₹40,000, the inflation rate is at 6%, and she will avail of a long-term return of 12% till she turns 60 and then a 5% return after that. This means, she will have to begin investing ₹14,820 on a monthly basis until her retirement to build a fund of ₹4.05 crores.

This example shows that Dia can easily invest a desired sum of money on a monthly basis towards her pension plan over the next 28 years. Moreover, this also shows she is working towards the plan, considering the inflation rate, which is one of the most important factors that can affect your pension plan.

Are there any good pension plans in India?

Pension plans work as a regular source of income in one’s retirement years. After they finish their working years, pension plans give retirees continuous financial support. The main characteristic of a pension plan is that it provides regular payouts (annuities) over a long time. There are several pension plans in India, but a few can provide the scope of financial protection retirees seek.

Depending on the mode, he/she can receive the annuities in one of three ways:

• Immediate Life Annuity: Here, the annuitant or his/ her spouse in the case of death receives payments up to his/ her lifetime as soon as the annuity plan commences.
  
  
• Immediate Life Annuity with Return of Purchase Price: Here, the annuitant or his/ her spouse in the case of death receives payments up to his/ her lifetime as soon as the annuity plan begins. Upon the death of both annuitants, their nominee gets the total purchase price paid by the annuitant while buying the annuity plan as a death benefit.
  
  
• Deferred Life Annuity with Return of Purchase Price: Here, the annuitant or his/ her spouse, in the case of death, receives payments up to his/ her lifetime after a delayed period (anywhere between 1 and 10 years as per his/ her preference). Upon the death of both annuitants, their nominee gets the total purchase price paid by the annuitant while availing of the plan as a death benefit.

The Tata AIA Life Insurance Policy payment for this annuity plan requires only a one-time payment. Here, the annuitant does not have the option to make payments in instalments and has to deposit the entire amount in one go. However, he/she has the freedom to make top-up purchase payments to increase the scope of the annuity payouts.

There is also a pension plan tax* benefit that comes with annuity pension plans where you become eligible for getting tax* returns up to Rs. 1,50,000 per year as per Section 80C of the Income Tax Act, 1961.

Further, you can use the pension plan calculator from Tata AIA Life Insurance to get an idea of how much annuity you need.

 

To conclude

A pension plan is a gateway to stability much needed in the later years of one’s life. Without it, your entire life can become an unending chore.

L&C/Advt/2022/Aug/1985