Pension Plans

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  • What is a pension plan and why should I buy?

    Pension plans offered by insurance companies help individuals build a retirement corpus. It typically let you allocate a portion of your savings to accumulate over a period of time and gives you a source of income when you retire.

    The money invested is allocated across various funds for generating a regular cash flow of income during retirement period, which is referred to as pension or annuity. Pension plans are distinct from life insurance plans, which cover risk in case of an unfortunate event and secure future.

    Pension plan or Retirement plan are crucial investment plans that takes care of your financial needs post retirement. No matter what your current earnings are, it is advisable to invest in a pension plan, because medical emergencies or financial crises can happen any moment post-retirement. The amount invested in a pension plan grows manifold through compounding effect and creates a corpus to take care of your financial needs after retirement.

    An Illustration

    Let’s take the case of Mr Saxena, aged 30 years, who wants to avail a pension plan with a sum assured of Rs. 5,00,000 for a tenure of 30 years. The premium he would be paying for the same is approximately Rs. 13,500. In case of his unfortunate demise, his beneficiary will stand to get the sum assured of Rs. 5,00,000 plus the bonuses or additions, if any.

    In case Mr. Saxena survives the tenure, he will stand to benefit to the tune of the maturity amount. He could also opt to receive the pension either monthly, quarterly, or half-yearly as is available with most life insurance companies.

    Traditional Plans vs Unit Linked Pension Plans (ULPPs)

    The traditional non Unit-Linked Pension Plans are typically the ones that invest a major portion of the premium monies in bonds and government securities. They are more oriented towards debt funds, as these provide a certain guaranteed sum assured to the policyholders at the end of the policy tenure. Since a major part of their investment—about 60%—is in government securities, it may not be possible for a traditional plan to give returns that would beat inflation.

    ULPPs are more dynamic in nature and have several appealing factors to be considered as an apt retirement planning tool. These market-linked plans give policyholders the flexibility to choose fund types and the investment limit they want for equity investment. An option to switch between the investments (debt and equity) three to four times a year is provided to the investors. ULPPs are best for long-term perspective. As retirement planning is a long-term exercise, individuals would do well to park their money in these plans.

    According to IRDA mandates, both traditional policies and ULPPs have to provide minimum guaranteed returns, as they are aimed at building retirement corpuses. Traditional pension plans guarantee a minimum sum assured, along with bonuses if any, while unit-linked plans provide an average of 6-7% return.

    Pension plans can also be broadly classified and compared as below:
    • Plans with life cover and without life cover
    • Immediate Annuity Plans and Deferred Annuity Plans

    Investing in any pension plan is basically building a corpus slowly and steadily to secure your retirement years. So the early you start, the better. Based on one’s need, lifestyle and risk appetite plans can be availed.

    Best features that an ideal pension plan must have

    It is important to make hay when the sun shines. Insurance companies have come up various pension plans to help you have a happy and secured retirement life without any financial worries. Pension plans provide you a corpus fund and a regular income to help you live a comfortable life post retirement.

    There are certain features that you must look into an ideal pension plan before choosing one.

    A death cover with your pension plan

    You have bought a pension plan to take care of your retirement. But you never know when death can rob you of enjoying your retirement life and put financial burden on your family members or beneficiaries. Hence, you must ensure your pension plan has a death cover that will give your family financial compensation on your untimely death. Usually, death cover comes by default with a retirement plan. But you must check that it is provided for in your retirement plan. Usually, insurance companies provide death benefit which is higher of the fund value of the policy or 105 % of the premium paid till then.

    Option to choose annuity option you prefer

    Once you have withdrawn one-third of your accumulated fund, you can choose an annuity plan for the balance two-third corpus fund. You should check the pension plan about the various annuity options available for you. Ideally, you should be able to choose the option that you think best suits you. You can choose immediate annuity option or life annuity option among others. You can even choose to receive pension as long as you and your spouse are alive. Some insurance companies offer as much as six different annuity options to choose from.

    Minimum guarantee

    You should check out the minimum guaranteed amount offered by the pension plan. Minimum Guarantee amount or guaranteed maturity benefit is nothing but sum assured plus all accrued bonuses that is payable to the policyholder on vesting. Most insurance companies offer a minimum of 1 percent of total premium over the complete policy term.

    Now, the guaranteed maturity benefit amount is available to the buyers at the time of buying the policy.

    Flexibility in investments

    You would like to enjoy a higher income in your retirement life. Then, you should check out that your pension plan has a feature that allows you to decide the asset allocation of your fund. You can choose to be a bit risky if you are young and can afford to take more risks. For example, you can start with 100 percent equity and move on to debt gradually to get higher returns on your fund. In such plans, you can switch your fund profile depending on the circumstances. So, you have the option to be flexible and invest in the assets which you think is profitable and dependable.

    Usually, pension plans serve the purpose of securing your retirement life. But you must make sure that it should suit your requirements and must have features that will meet your needs.

    Advantages of a Pension Plan

    If you are in a job, retirement is an inevitable phase of your life. If you are a businessman, after a certain age, you will not be able to invest time and energy in your business. So, you have to think of certain ways to keep your family expenses going. You can’t change your lifestyle or social status after retirement neither it is expected. This is where you need a pension plan.

    This is another marvel of life insurance where you can receive regular income even after your retirement. The aim of a pension plan is to secure your and your family’s post retirement life. You can take care of all your basic needs and maintain your status intact even after retirement if you have a good pension plan.

    Types of Pension Plans

    There are many pension plans available in the market to choose from. Study the different kinds of pension plans available so that you can choose the best one as per your future requirements and present financial ability.

    There are two ways you can invest in pension plans: Traditional pension plans or ULIP based pension plans.

    ULIPs are market-linked plans, which means the maturity amount on your investment will not remain fixed while in traditional pension plans your periodical returns are guaranteed. However, in ULIP you also have the scope to gain more income than expected if the market return is higher than expected.

    An example will make this clear.

    Suppose your current age is 40 years and you invested in a pension plan where you have to pay Rs.50000 annually for 10 years. You want your pension to start after 20 years—when you reach the age of 60 years—and continue till you reach 80 years. In this scenario, in a traditional pension policy, you can get almost Rs. 1 lakh every year depending on the policy you choose. However, in the case of ULIP, this is not guaranteed.

    Advantages of a Pension Plan

    Apart from securing your future, a pension plan has several other benefits:

    • Guaranteed life time income: On the maturity of a pension plan, say after 10 years or 20 years, you get steady monthly income for a certain number of years after retirement. No other insurance can provide such a benefit. You have the option of choosing the pension receiving term. Some policy holders prefer to receive it until death while others prefer to receive for a certain period.
    • The best way to meet health care needs: Old age brings with it a lot of health issues but getting a health care policy after 60 is very tough and sometimes expensive too. Medical bills substantially increase during this period of life. A planned pension policy can meet your health expenses without stressing you out.
    • Flexible premium options: The maximum premium option can be as high as 50 lakhs per annum, so you have plenty of premium paying options. You can even make a one-time payment as a lump sum. Pension plans are the best insurance option to invest your hard-earned income for the future as per your plan.
    • Death benefit: The death benefit of pension plans is also advantageous for your family. Though the aim of a pension plan is to create a fund for post-retirement expenses, after the death of the policy holder, the nominee or beneficiary gets the sum invested with other predetermined benefits. Suppose, your pension benefit or annuity continues from 60 to 80 years, after your death, the nominee will get the entire sum invested, which will be a lump sum.
    • Tax benefits: Like any traditional insurance policy, you will get tax benefits on all the premiums under section 80CCC of IT Act.

    Pension plans provides the necessary financial freedom that most people need after retirement or when they are no more in a condition to work or earn. For maximum benefit, you should start early. Investors who can start the policy before 30-35 years of age stand to gain more. Let the fund accumulate when you are young and able to earn, and enjoy the benefits of a pension plan when you actually need a steady source of income.

    Top 10 Online Pension Plans in India

    Pension planning is one of the core essentials of a good financial plan. With multiple life insurance pension plans available in the market today, choosing the right pension plan can sometimes be a difficult proposition.

    Here are 10 most popular pension plans that can be useful for individuals with different financial needs and plans.

    1: Reliance Nippon Life Smart Pension Plan

    Reliance Nippon Life Smart Pension Plan is a unit linked, non-participating, pension plan allowing policyholders to build a corpus for your golden years. You can choose a policy term from 10 to 30 years, as per your convenience as well as enhance the retirement corpus through loyalty additions. The plan also offers a choice of choosing the vesting age from 45 to 75 years and extension of retirement age as per your needs. The plan comes with tax-free withdrawal of 1/3rd of the accumulated corpus upon retirement.

    2: HDFC Life Personal Pension Plus

    HDFC Life Personal Pension Plus is a popular pension plan offering assured benefit equal to 101% of all regular premiums paid on death or at vesting. The plan offers flexibility to choose the premium payment frequency and comes with an EMI facility for HDFC Bank Credit Card holders. The plan can be taken only on a single life basis with a policy term of 10 to 40 years.

    3: SBI Life Saral Pension Plan

    SBI Life Saral Pension is a individual, participating, non linked and traditional pension plan offering corpus to meet your retirement needs. The plan offers retirement corpus through regular simple reversionary bonuses throughout the policy term. The plan offers the flexibility to extend the accumulation period or defer the vesting date up to 70 years. The plan also pays out a simple reversionary bonus throughout the policy term.

    4: Bajaj Allianz Retire Rich

    Bajaj Allianz Retire Rich plan offers assured vesting benefit and guaranteed death benefit making it a popular pension plan. With the option to select regular, limited or single premium payment and flexibility to pay top-up premium, the plan offers additional loyalty additions added to the final fund value on the original vesting date.

    5: Reliance Nippon Life Immediate Annuity Plan

    Reliance Nippon Life Immediate Annuity Plan is a well known immediate annuity plan offering a regular income for entire life. With only a one time premium payment you get to choose from 3 various categories of annuity payout. Life annuity, Life annuity with return of purchase price and life annuity guaranteed for 5, 10 or 15 years and payable for life henceforth are the three options available.

    6: HDFC Life Guaranteed Pension Plan

    HDFC Life Guaranteed Pension Plan is a non participating deferred pension plan offering guaranteed benefit on death or at vesting. The plan offers guaranteed additions added to it each year along with the lump sum vesting addition payable. The plan is tailor made for individuals seeking guaranteed returns on invested corpus at retirement to ensure a substantial post retirement corpus.

    7: BSLI Empower Pension Plan

    BSLI Empower Pension Plan is a non-participating unit linked pension plan. The plan helps accumulate your premiums and the investment returns thereof into a corpus for your retirement. On vesting date, the plan offers the policyholder the greater of the guaranteed vesting benefit or the fund value. As a death benefit, the plan pay to the nominee the greater of the guaranteed death benefit or fund value as on date of intimation of death.

    8: LIC Jeevan Nidhi

    LIC Jeevan Nidhi is a conventional pension plan that offers dual advantages of pension along with saving features. The plan offers death cover during the deferment period and annuity on survival till the date of vesting making a popular pension plan. The policy provides for guaranteed additions to the tune of Rs.50 per thousand of the basic Sum Assured for each completed year for the first five years.

    9: LIC Jeevan Akshay-VI

    LIC Jeevan Akshay-VI is an Immediate Annuity plan available by paying a lump sum amount as per the eligible age bracket for the policyholders. Annuity is payable for 5, 10, and 15 or 20 years certain and thereafter as long as the annuitant is alive. The Annuity payable for life increases at a simple rate of 3% p.a. The policyholder can opt for annuity payment either at monthly, quarterly, half yearly or yearly intervals.

    10: Aegon Life Insta Pension Plan

    Aegon life insta pension plan is a popular pension plan that is tailor made to pay a continuous income post retirement for the rest of the life. The plan offers life annuity along with joint annuity payouts with the spouse with payments of annuity made either annually or monthly as per preference of the policyholder. As a non-linked, non-participating single premium immediate annuity plan, loan cannot be availed on the policy.

    Top 10 online Pension Plans in India at a glance

    Pension Plan Min-Max Entry Age Vesting Age Policy Term Minimum Premium Sum Assured Premium Paying term Premium Paying Frequency
    Reliance Nippon Life Smart Pension Plan 18-65 years 45-75 years Single premium: 10 years Regular premium: 15 years- 30 years Regular pay annual mode: Rs. 36,000 for 15-19 years term Regular pay annual mode: Rs. 20,000 for term above 20 years Limited Pay annual mode: Rs. 48,000 for 15-19 years term Limited pay annual mode: Rs. 24,000 for term above 20 years -- 10-30 years Annual, Half-yearly, Quarterly, Monthly and Single
    HDFC Life Personal Pension Plus 18-65 years 55-75 years 10-40 years Annual: Rs. 24,000 Half-Yearly: Rs. 12,000 Quarterly: Rs. 6000 Monthly: Rs. 2000 The minimum sum assured on vesting: Rs. 2, 04,841 Equal to policy term Annual, Half-yearly, Quarterly, Monthly
    SBI Life Saral Pension Plan 18-65 years 40-70 years For single premium: 5-40 years For regular premium: 10-40 years Rs. 7,500 per annum Rs. 1,00,000 Equal to policy term Single, Annual, Half-yearly, Quarterly, Monthly
    Bajaj Allianz Retire Rich 30-73 years 37-80 years 30 years Deferment periods available: 7 years to 30 years (both inclusive) only Single Premium 7 to 10 years: Rs. 1,00,000 11 years and above: Rs. 50,000 Regular Premium Less than 7 years: Rs. 50,000 p.a 7 to 10 years: Rs. 25,000 p.a 11 years & above: Rs. 15,000 p.a -- Up to the Policy Term chosen Regular/ Limited Premium Payment option
    Reliance Nippon Life Immediate Annuity Plan 20-80 years NA NA NA As per underwriting NA Monthly, Quarterly, Half-yearly and Annually
    HDFC Life Guaranteed Pension Plan 35-65 years 55-75 years 10-20 years Annual: Rs. 24,000 Half-Yearly: Rs. 12,000 Quarterly: Rs. 6000 Monthly: Rs. 2000 The minimum sum assured on vesting: Rs. 81,145 5, 7 and 10 years Annual, Half-yearly, Quarterly, Monthly
    BSLI Empower Pension Plan 25 – 70 years maximum vesting age of 80 years 5 – 30 years subject to maximum vesting age of 80 years Minimum Rs. 18,000 p.a. if paid annually Minimum Rs. 24,000 p.a. if paid semi-annually Minimum Rs. 30,000 p.a. if paid quarterly; or Minimum Rs. 36,000 p.a. if monthly -- Regular Pay Annual, Half-yearly, Quarterly, Monthly
    LIC Jeevan Nidhi 20-60 years 55-65 years 5-35 years NA Rs.1,00,000 under Regular Premium policies Rs.1, 50,000 under Single Premium policies -- Yearly, half-yearly, quarterly or monthly
    LIC Jeevan Akshay-VI 30-85 NA NA NA Rs. 500 per month NA  
    Aegon Life Insta Pension Plan 50-75 years NA NA Minimum - Rs. 1,00,000 Maximum - No limit NA Single Premium NA

    What are the different types of annuity options available in the market?

    If you have a large sum of money and clueless what to do with it, but wish to earn regular income from it, then you can try investing your money in annuity. This mode of investment is a contract between the insurance company and the annuitant whereby, in exchange of a large sum of the money, the former promises to pay the latter a regular income or annuity for a certain period of time, provide death benefits, asset growth, and even long-term care benefits.

    There are different types of annuity options available in the market that you can invest in. The types of annuity options available in the market depends on factors such as the scheme offered, annuity amount given, and when it is given. Let us have a look.

    Annuities offered based on the type of amount given

    Fixed Annuity: As the term suggests, the amount of annuity offered in this plan is fixed over the period of the plan or till death. The amount does not change throughout the duration of the plan. It provides protection against reducing rate of interest, as the annuity is fixed throughout. This annuity option is good for conservative people who prefer fixed income rather than investing in market-linked equities. However, the real value of this fixed annuity will keep reducing due to rising inflation.

    Variable Annuity: This plan is high risk, offering high returns as you can invest in variety of assets, ranging from conservative fixed deposits and government bonds to more aggressive investment such as in emerging markets, capital appreciation, among others. However, there is a minimum guaranteed annuity in such a plan.

    Annuities offered based on time

    Immediate annuity: This plan is reliable for those who are looking for quick returns and are nearing retirement age. This plan offers pension to the annuitant instantly, without waiting for any period.

    Deferred annuity: In this plan, you choose to receive pension after a period of time. For example, you invest Rs 50 lakh in an asset of your choice for the next four years. The fund keeps growing for the next four years. Suppose, it accrues to Rs 60 lakh after the fourth year. Then you are entitled to receive annuity on Rs 60 lakh after the fourth year.

    Annuities offered based on scheme

    Life annuity: This is a preferred annuity plan as it provides guaranteed pension till the death of the person.

    Life annuity with return of corpus: Besides getting a guaranteed annuity till the end of your life, your nominee will be entitled to receive the corpus or the initial investment made post your death in this plan.

    Annuity guaranteed for a fixed period: In such as plan, you can choose the period you wish to receive guaranteed pension. It can be 5, 10, 15 or 20 years. However, if you die within the period, your nominee is entitled to receive the pension for the remaining period. Another variation of this plan is that if you survive the term, you are entitled to receive the same pension till the end of your life.

    Hence, it is found that annuity is one of the best ways to earn guaranteed returns in your savings. But if you are looking to invest in aggressive assets, be prudent to take the help of a financial advisor.

  • Q: What is a pension plan?

    Q: What is annuity in a pension plan?

    Q: What is the difference between deferred annuity and immediate annuity?

    Q: Why should I consider opting for a pension plan?

    Q: Is pension plan required if I have a PPF account?

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