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Top Benefits of Pension Plans in India

With a boom in private sector employment opportunities, the awareness for pension plans has increased more than ever.

And why not?

Considering the lifestyle changes and ever-increasing inflation, it is important to have your post-retirement finances sorted if you want to enjoy your golden years stress-free.

Pension plans stand out as a cornerstone of financial security, offering individuals a structured approach to retirement savings and a myriad of benefits that ensure not just financial stability but also peace of mind in one's golden years.

In this comprehensive guide, we delve into the numerous advantages of pension plans, shedding light on why they remain an indispensable asset in any well-rounded financial strategy.

What is a Pension Plan?

A Pension Plan is an investment tool that provides a regular income during retirement years.

In some cases, it's an employee benefit offered by certain companies wherein the employer and employee contribute regularly to a dedicated fund. This investment grows over time and on retirement of the employee, it provides a steady income stream.

Sometimes it's not provided as an employee benefit and needs to be planned by the individual. There are many investments plans available for this purpose that help create retirement funds.

Pension Plan generally has two stages:

Accumulation Phase - This is the time when you invest your money, and it grows.
Vesting Phase - Here, you start receiving your income from the investment.

Let’s have a look at the major benefits of pension plans and why it is important to have your retirement planning done with a well thought of pension plan.

What Are the Major Benefits of Pension Plans?

Having a well evaluated retirement plan is a crucial component of a robust financial planning. Let’s see the advantages of retirement plans and why they are a must to have:

1. Long Term Savings

Pension plans are long term, and you can contribute regularly during your earning years. Thus, over a long period you build a large corpus that guarantees a steady income during the post-retirement phase.

2. Maintaining Lifestyle

With an increased life expectancy, ever growing inflation, a stepped-up lifestyle, pension plans have become an absolute necessity. They provide a financial cushion of steady income ensuring that retirees maintain their standard of living without the constant worry of outliving their savings.

3. Tax Advantages

The contributions made towards pension plans are tax exempt under section 80C as per the prevailing income tax laws. However, the pension gained from these plans is considered similar to salary income and is thus taxed basis the regular income tax slab.

Check more about the taxability of pension.

4. Power of Compounding

The golden feature of investing is “Power of compounding”, which refers to generating interest on interest. Thus, the longer you stay invested, the higher are your returns because they get a longer growth phase.

Pension plans leverage this power of compounding because they get a long growth phase during the earning years.

5. Consistent Growth Through Investments

Pension funds are typically invested in a diversified portfolio, allowing for potential growth over the years. The continued contributions over a period generate returns that are reinvested, leading to accelerated growth. This investment component adds a layer of dynamism to pension plans, thus maximising the returns.

6. Peace of Mind

A peace of mind that your retirement is financially secure with steady income flow and your dependents are also financially protected in case of your unfortunate demise. That’s what the pension plans offer.

Beyond individual financial security, insurance-based pension plans also extend their benefits to financial protection for beneficiaries. This coverage ensures that in the unfortunate event of the policy holder's demise, their loved ones continue to be financially protected.

How to Choose the Right Pension Plan?

While choosing a retirement plan for yourself, you must consider the following factors:

1. Financial Goals

Assess your current financial situation and future retirement needs. Consider factors such as desired lifestyle, healthcare costs, potential inflation, future financial goals, etc. to determine the amount of savings required to support your retirement lifestyle adequately.

2. Plan Features

Explore the variety of retirement plans available. Compare features such as contribution, investment options, customisation, returns, tax implications, liquidity, etc., to find the plan that is best aligned with your financial goals.

3. Investment Preferences

Evaluate your risk tolerance and investment preferences to select an appropriate investment strategy. Decide between conservative, moderate, or aggressive approaches based on factors like age, time horizon, and comfort level with market fluctuations.

4. Flexibility and Accessibility

Consider the flexibility and accessibility of your chosen retirement plan. Check how aligned it is to your financial goals. Assess whether you need the option to withdraw funds before retirement age without penalties or if you prefer locking in funds for long-term growth and security.

Embracing a retirement plan is not just a financial choice; it's a strategic investment for a secure and stress-free future. Its numerous benefits reinforce the crucial role it plays in safeguarding one's golden years. Regularly review your retirement plan to ensure it remains aligned with your financial goals and evolving needs.

The peace of mind derived from having a well-planned financial corpus for your retirement years, coupled with financial protection for loved ones, is a much-needed reassurance for a happy and fulfilling retired life.

Frequently Asked Questions

How Much Should I Contribute to my Pension Plan?

The amount you contribute must be decided based on factors like your age, income, retirement goals, and employer matching contributions if available. Aim to contribute enough to maximize returns and meet your retirement needs.

Do Pension Plans Offer Survivor Benefits?

Yes, the insurance-based pension plans provide survivor benefits, ensuring that your beneficiaries receive continued financial support in case of your unfortunate demise.

What Happens to my EPF if I Change Jobs?

In cases of job switch from an organisation to another EPFO registered organisation, a fresh PF account is opened under the same UAN. You can transfer your existing balance from your previous account to the other.

Is it good to invest in pension plan?

Pension plans are designed to provide a safe investment, resulting in steady income in your retirement years. Thus, it's a prudent decision to invest in a pension plan.

Is pension money safe?

Yes, Pension money is safe, especially if it's managed by reputable institutions. However, the returns might depend on the managing institution and the plan chosen by you.

What are the disadvantages of NPS?

The National Pension System (NPS) offers several advantages but has a few drawbacks too. It has limited early withdrawal options, mandatory that a portion of the corpus must be used to purchase an annuity, and NPS Tier1 returns are also subject to market risks.

Can you take loan on pension?

Pension is considered a stable source of income. Hence many lenders provide a loan against pension.

Can pension plan be surrendered?

Yes, most pension plans can be surrendered before the maturity date, but this often comes with high surrender charges.

Other Important Articles Related to Retirement & Pension Plans

Single Premium Pension Plan

Unit Linked Pension Plans

Defined Benefit Pension Plan

Planning

Age

Early Retirement

Retirement Investment Plans in India

Guides

Guaranteed Pension Plan

Disclaimer

This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.