A deferred pension plan allows you to accumulate retirement savings during your employment phase and choose when to start receiving the pension payments. A deferred pension plan offers flexibility and financial security for your golden retirement years.
Retirement planning is an essential financial initiative that can drive stress-free and independent golden years of retirement. Among many retirement planning tools, a deferred pension plan can be a great option to help you plan your retirement.
Deferred pension, an option part of a retirement annuity plan, gives a great deal of leeway when investing for retirement. You can let your investments grow, delay utilising pension funds, or leave a legacy for your loved ones.
To help you understand this better, let us take a look at the deferred pension definition, types of deferred pension plans, why you should invest in a deferred pension plan, and more.
As the concept can get confusing, before we start, let us understand what a retirement annuity plan means, types of annuity plans, and then get into the details of a deferred pension.
What Is A Retirement Annuity Plan?
A retirement annuity plan is a financial plan that allows you to accumulate funds for your retirement, utilise a portion of it to withdraw as a lump sum when you retire at the age of 60, and utilise the remaining amount to purchase an annuity plan for a regular pension throughout your life.
A retirement annuity plan has two phases:
Accumulation Phase - During the accumulation phase, you secure a specific fund towards your retirement pension plan throughout the policy period.
Vesting Phase - At the end of the accumulation phase, you can withdraw a portion of the fund and utilise the remaining to purchase an annuity plan that provides a pension throughout your life.
You can also circumvent the accumulation phase by directly purchasing an annuity plan and parking your retirement corpus from your organisation.
While purchasing the annuity plans, you have two major choices: the immediate and the deferred annuity plans. The choice of annuity plan option will depend on your individual financial requirements.
Types of Annuity Plans
Immediate Annuity Pension - In an immediate annuity plan, you will start receiving the pension amount immediately after purchasing the annuity plan.
Deferred Annuity Pension - In a deferred annuity pension, you will choose to start receiving the pension after a few years.
What Is A Deferred Pension?
A deferred pension is the type of pension that you start receiving at a later date rather than immediately after purchasing the annuity plan. Therefore, you can decide on the payout date and the type of deferred pension plan.
Retirement planning is a significant financial goal, and if you prefer deferring your retirement benefits considering your personal and family financial commitments, a deferred pension plan is an ideal choice.
Types of Deferred Pension Plans
Fixed Deferred Pension - In a fixed deferred pension scheme, you will receive a fixed amount as the pension based on the amount you have accumulated over the years. Furthermore, you will be assured a minimum pension amount when investing in such deferred pension plans. You will receive this minimum amount, which can be higher than this value.
However, the interest payment will be deferred in such schemes until you withdraw a lump sum. Therefore, the fixed deferred pension is suitable if you prefer securing interest savings for your future financial goals.
Variable Deferred Pension - In the variable deferred pension plan, your retirement fund is invested in financial instruments such as stocks based on your risk appetite, age, and other factors. Therefore, the pension will depend on the returns from these investments and the performance of these assets in your portfolio.
Indexed Deferred Pension - The indexed deferred pension is based on the investment made in an equity-indexed fund option and is linked to a return-based formula in a market index. Based on its returns, it is considered a combination of both the fixed and variable deferred pension.
Longevity Pension - A deferred pension benefit pension provides a pension throughout your life. You can utilise the amount to pay for your routine expenses and lead a financially independent life.
When Should You Defer Your Pension?
Deferred benefit pension can be chosen during the following scenarios:
When you are still earning - You can choose to defer your pension if you are still earning an income from a different source, such as your business, extension of service in your organisation, etc.
When you have sufficient savings - If you have sufficient financial resources such as your savings, you can choose to utilise them first and then start with the deferred benefit pension.
When you want to leave a legacy for your dependents - If you are financially stable to meet your current financial needs and would prefer to leave a legacy for your dependents to secure their life in your absence, you can defer your pension.
Why Should You Invest In A Deferred Pension Plan?
A deferred pension benefit plan can provide access to wide-ranging benefits.
Multiple deferred pension plan options - You can choose between the different deferred pension plan options based on your financial conditions and future family commitments.
Delayed pension benefit - In a deferred pension plan, you can decide when you need to start receiving the pension and delay it until then to secure your financial investment. It will help you use the pension benefit when needed while utilising the funds you have already saved for life.
Provide more opportunity for your pension to grow - The more your funds stay invested in a retirement pension plan, the better the opportunities for it to grow and the higher the benefits during the long term.
At Tata AIA Life Insurance, we offer wide-ranging retirement plan options to customise the products based on your investment and financial requirements.
Disadvantages of A Deferred Pension Plan
While choosing a deferred pension plan can offer several benefits, it also has some downsides. Understanding these downsides can help you make well-informed financial decisions.
While the deferred pension provides the option to grow and defer the pension, it is subject to market risks and can result in a typical fall in the investment value.
If the annuity rates fall due to economic or political reasons, the pension benefit will be comparatively lesser than if you had availed it earlier.
When you plan to access the pension benefit later, there are chances that you might end up losing the benefits completely. It is a possible scenario when you meet with an unexpected demise before you start receiving the pension.
Deferred pension plans empower you to take control of your retirement timeline, customise your pension plan to your unique needs, and secure your golden years. You can choose between the different deferred pension options and optimise your retirement planning needs.
When you decide on an annuity plan option, you can judge your decision on why you need a deferred pension or when you need a deferred pension based on your family’s financial commitments. So, your golden years of a beautiful retirement life await. Seize it with a well-informed, deferred pension plan!