Pension plans are effective instruments offered by life insurance companies. They help individuals in the efficient planning of their retirement days.
Pension plans are those schemes that provide regular income to individuals during their old age years. However, individuals are gradually moving away from such investment options as the tax benefits in their case are limited to Rs. 10000. But it is essential that they consider these plans more from the retirement planning point of view than just a mere means of reducing tax payment.
Detailing Pension Plans
In simple terms, pension plans are undertaken by individuals for the purpose of receiving a regular stream of income from insurance companies. The national pension schemes provide an annuity or pension that is calculated on the basis of a certain percentage of return. These pension plans are different from the concept of life insurance plans that are generated for covering the risks of adverse events, such as death.
What are the Benefits of Pension Plans?
It is to be noted that the rates of return on pension plans are not calculated on the basis of the premium being paid. Rather, they are calculated after subtracting all basic costs from the amount of premium. The conventional retirement plans are directed towards investing a huge amount of the premium paid upon government securities and bonds. This is the reason why the returns look lower than that offered by other types of investment schemes like mutual fund. For instance, assuring a sum of Rs. 500000 at 10% rate of return would fetch around Rs. 118500 after paying an annual premium of Rs. 13500 for 30 long years. At this point, the Unit Linked Insurance Plans (ULIPs) can be effective in the exercise of retirement planning.
Plans “with cover” and “without cover”
The pension plans are classified into two categories- with cover and without cover. The first category signifies that the pension plans offer a sum assured for an eventuality. In case of the “without cover” pension plans, the amount built till date after deducting costs and premiums is provided to the nominees when there is the occurrence of an eventuality. In this case, there is no sum assured.
“Immediate Annuity” and “Deferred Annuity” Plans
In the case of immediate annuity plans, the pension or the annuity starts within a year of paying the premium that is actually a one-time amount. The paid premium is also known as the purchase price. An example of this type of pension plan is Jeevan Akshay II of LIC. However, the pension or annuity does not immediately commence in case of a deferred annuity plan. It is deferred up to a certain time frame which tends to be a decision of the policyholder. For example, suppose an individual has bought a 30 year old pension plan. Then, the annuity related to this plan can start 30 years hence.
Options Available on Pension Plans for Individuals
These four different types of options for pension plans are available to Indian individuals:
- Option of receiving annuity through one’s lifetime without returning the purchase price.
- Lifetime annuity with an option of returning the purchase price.
- Assured lifetime annuity for a specific period of time.
- Joint life annuity or last survivor annuity.
It is obvious that pension plans help an individual prepare for his after retirement needs. They are effective means of generating income for life. Thus it is going to be extremely beneficial to include pension plans in your planning for retirement as well. Go for them right away.