Do you work in the private sector? If yes, you might have a common dilemma that almost all private sector employees face, i.e., the absence of an official and guaranteed workplace pension to meet your monthly expenses after retirement.
However, despite the lack of any guaranteed financial support for their retirement, most private sector professionals put off their retirement planning till the last few years of their working lives, leading to insufficient amounts that cannot meet inflation-adjusted future expenditures. Hence there is a need to plan smartly for your twilight years in advance. Here is a guide on how you can get there.
How You Can Start Investing In A Pension Plan For Retirement:
When it comes to securing a source of regular income after you retire, pension plans or retirement plans may help you achieve your goals.
Pension plans, or annuity plans, are investment avenues where you can accumulate money and create a retirement corpus to meet your retirement needs. These plans ensure a steady income flow after retirement for the policyholders.
You can choose a deferred annuity plan where you have to put in monthly, quarterly, half-yearly, or yearly payments for the term that you choose for your plan. Then, once the policy tenure is complete, you get an annuity, i.e., a fixed amount at your chosen repayment time and frequency for the remainder of your lifetime. This payment from the insurer can help in making up for the loss of income post-retirement.
On the other hand, you can go for an immediate annuity plan where you have the option of making a one-time lump sum payment to purchase the plan and start getting payouts immediately once the payment is made. It is a suitable option if you are close to retirement and do not have a pension plan.
You can first use a free online retirement planning calculator and work out the amount you will require to meet all your needs in the future. You can then check out available pension plans and choose one accordingly. It is crucial to have the right estimate of your needs and start planning as early as possible because, with the cost of living rising constantly, you will need time on your hand to accumulate funds.
Let’s understand this with an example. Shyam works in a multinational corporation and earns about ₹15 lacs annually. He still has around 25 years left for his service and wants to save for at least 15 years of retirement. If his monthly expenses are ₹70,000 at present, then he will need at least ₹2.5 crores saved up for his retirement, considering a 5% inflation rate and an 8% return on his investments.
None of this is permanent and will need constant assessment. A retirement planning calculator will help immensely, but Shyam will also need sound investment planning to achieve his required corpus. Getting a pension plan when he still has a long investment horizon is the first step toward it.
Main Advantages Of Pension Plans
- You can opt to invest early in a retirement plan and build up a sizable corpus for retirement. These plans offer the benefits of compounding, i.e., when your returns are re-invested to generate further returns. In the long run, it can mean an exponential return increase and ensure that the amount accrued by the end of the policy term is sufficient.
- After retirement, you can get the sum as an annuity or fixed periodic pension. As mentioned, this can make up for the lack of your income. You can also opt for a lump sum payment of 1/3rd of the total funds and get the rest in fixed periodic payments. This type of flexibility in repayment helps you utilize your retirement funds in a manner tailored to your needs.
- You can also get life coverage along with your pension plan to secure your family’s financial future in case of your unfortunate demise within the policy period.
- These plans come with tax benefits on the premiums paid.
Additional Points to Remember About Pension Plans
Finally, many people have queries about pension plans and their associated aspects. Here are some pointers that will help clarify most of your questions in this regard.
- Some pension plans include life insurance coverage. These offer a sum assured payout to the nominee in case of the policyholder’s demise within the policy period. Otherwise, you can continue accumulating funds for retirement as well. You can either opt for a pension plan with life coverage or choose a separate term insurance plan with your pension plan.
- You can also consider NPS (National Pension Scheme) as your pension plan. You can contribute to a specified pension account in this system, and the money will be invested across asset classes. Upon retiring, you can take a part of the money as a lump sum amount, and the remainder will buy an annuity which will give you a monthly payout.
- You should start investing in pension plans as early as possible if you wish to build a sizable retirement corpus that will last you comfortably throughout your retirement years.
- You can still purchase a pension plan despite being in the Employee Pension Scheme (EPS). The EPS is given by the employer, with a part of the salary going into the same every month. This offers monthly payments after retirement. However, you can still invest in a pension plan since the EPS amount may not be enough to take care of your lifestyle and family expenses, factoring inflation into the mix.
- You can get tax benefits on pension plans up to Rs. 1.5 lakh each year under Section 80CCC. You can also get deductions up to Rs. 50,000 on NPS as per Section 80CCD. For contributions that employers make, you can get deductions up to 14% of your basic salary if you are in the Government sector, and this goes up to 10% of the basic salary if you work in the private sector.
- The annuity payouts will be taxed as per your applicable tax bracket and applicable income tax rates.
It is essential that you make a robust retirement plan, especially if you are working in the private sector. Saving money for the future is essential if you are looking to retire into a peaceful, worry-free life. The secret to it is starting early and taking advantage of the long investment horizon.
