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Pension plans

About Pension plans
Pension plan or retirement plan are investment plans that helps an individual assign a part of their savings to collect over a period of time and provide them with steady income after retirement. These plans provide financial security to live with pride without compromising on the standard of living after the retirement. The sum gained at the end of term is known as annuity or pension.

This plan requires an employer to contribute into a pool of funds set aside for a worker’s future benefit. The pool of funds is invested on the employee’s behalf and the earnings on the investments generate income which is utilized by the employee upon retirement. Some pension plans also have a voluntary investment component in addition to an employer’s contribution. In this type of plans, an employee may provide part of their current income into an investment plan to support fund retirement.

Advantages of Pension plans
Long term savingsExclude effect of inflationTax benefitsRiders availableInsurance cum Investment
There is an assured long term savings in pension plans. Unlike the endowment policy these plans focus on creating an income which can be further invested to generate a steady cash flow after retirement.
These plans are designed to exclude the terrible effect of inflation. The plan offers a lump sum payment at retirement amounting to maximum of one-third of the money accumulated and the remaining two-third value of the amount will be utilised to generate steady cash flow for recurring expenses.
For the premiums paid up to Rs. 1.5 lakhs under Income-tax Act, 1961, employees can also enjoy tax benefits. Additionally, the pay-outs received at the time of maturity are also tax-free.
In case of critical illness or disabilities due to accidents, the pension plans can be tweaked to receive lump sum pay-outs. This policy can be used to bolster one’s long term health care related cover as well.
These plans can also be a combination of investment as well as insurance. This means a person can go in for pension plan that will provide a huge amount of pay-out upon the retirement or death of an individual, whichever occurs earlier.
Types of Pension plans

There are many different types of term insurance policies available, which are as follows:

Deferred AnnuityImmediate AnnuityAnnuity CertainGuaranteed Period AnnuityLife Annuity
Deferred pension scheme allows to accumulate a huge amount through regular premiums or single premium over a policy term. After the end of policy term, annuity begins. These have immense advantages along with the tax benefits. No tax is imposed on the invested money unless the investor withdraws it.
In this type of policy, investor has to deposit a lump sum amount and the pension starts immediately based on the deposited amount.
According to the policy, pension is paid to the policyholder for a specific number of years. The policyholder can choose the period and in case of untimely death, the annuity will be paid to their nominee.
As per this plan, annuity is given to the insured for certain period like 5,10 15 or 20 years, whether or not they survive the duration.
As per this annuity option, pension is paid to the insured until death. If they choose ‘with spouse’ option, amount is given to the spouse, in case of death of the insured.