Types of Pension Plans in India

Retirement - the golden years of your life when you finally have the time to relax after years of toiling hard. 

However, with increasing age, lifestyle expenses increase, medical care is required more frequently, and medical costs are skyrocketing daily. Thus, proper planning towards building a steady income source or a corpus is needed to support your life in the post-retirement years. 

Pension plans are the solution to achieve this objective. Some of them provided by government and some by private organisations, directed towards the same goal: to provide a regular income for the retirement years.  

Let's have a look at the different kinds of pension plans available in the market:  

Pension Plan is an investment plan that helps you create a fixed, steady and regular income known as pension during your post-retirement years.

An Example of Pension Plan Working

Let’s consider Mr. Raman, who is 30 years old. He estimates his monthly financial requirement after he retires would be ₹ 60,000 per month. Thus, for the next 30 years, Mr. Raman aims to build a corpus that generates a monthly income of ₹60,000 per month in his post-retirement years. 

This is how a pension plan works. You invest a certain amount regularly during your earning years. This is called the accumulation phase, which helps you create a regular source of income that you withdraw during your post-retirement years. This period is known as the vesting phase.

There are many different kind of investment plans that can be used to create a regular income for retirement. However, the most common ones are as follows:

1. National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a voluntary and long-term retirement savings scheme in India, offering a systematic and flexible approach to build a pension corpus.

Here are the major features of this scheme:

• NPS is a market-linked investment scheme backed by the government of India and regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
• It allows individuals to invest in a mix of equity, debt, and alternative assets.
• People can keep investing during their earning years. When the investor turns 60, they can withdraw 60% of the corpus if it's more than 5 lakhs, the remaining 40% is invested towards annuity that creates monthly income.
• If the corpus is less than 5 lakhs, the complete amount can be withdrawn at retirement.
• NPS also provides tax benefits as below:
  • Deduction of up to 10% of pay (basic + DA) under section 80CCD (1) with an upper limit of ₹1.5 lacs u/s 80CCE.
  • Additional deduction of up to ₹50,000 u/s 80CCD(1B) along with the overall limit of ₹1.5 lacs u/s 80CCE.

This scheme is not restricted to employees alone, making it accessible for self-employed individuals and professionals too. With a focus on market-linked returns and portability across employers, NPS aligns with the evolving retirement needs of individuals.

2. Employee Provident Fund (EPF)

Employee Provident Fund (EPF) is a retirement savings scheme available to all salaried individuals in India.

The major features of this scheme are:

• In EPF, both employees and employers contribute a fixed percentage of the employee's salary towards a provident fund.
• Regular contributions help you build a huge corpus by saving small amounts every month from your salary for all the years you are employed, thus building a financial safety net for your retirement years.
• It offers the flexibility of partial withdrawals for specific purposes, like home loans or medical emergencies. Additionally, upon retirement, individuals can choose between a lump sum withdrawal or a monthly pension.
• The contribution towards EPF is tax-free under section 80C up to the limit of ₹1.5 lacs.

Thus, EPF not only ensures financial security but also instils the habit of disciplined savings among working people.

3. Annuity Plans

Annuity plans play a crucial role in retirement planning by providing a guaranteed income stream.

Here are the major features of this scheme:

• Annuity plans ensure financial security in retirement by converting a corpus into periodic payments, either for a fixed term or for the entire life of the annuitant.
• Annuity plans are of different types like immediate annuity and deferred annuity based on the time of return, single life, or joint life annuity, based on insured individuals, fixed annuity etc., thus allowing individuals to tailor the plan to their specific needs.
• With an immediate annuity, you can start receiving the income immediate or within 12 months of finishing your premium payments. While in deferred annuity, you start receiving your income after a certain ‘deferment’ period.
• You can opt to get this annuity income for a fixed period or for the rest of your life.
• As for the taxation, you can claim tax benefits under section 80C on the premiums paid towards annuity insurance plans. However, the annuity income received is taxable as per the prevailing income tax laws. 

The certainty of a regular income makes annuity plans an attractive choice for risk-averse retirees or people planning for retirement.

The types of annuities provide a diverse selection pool for choosing the right product as per the investor goals and requirements, thus making them a valuable instrument for retirement income planning.

4. Whole Life ULIP Plans

Whole Life ULIP Plans provide coverage for the entire life of the policyholder, along with corpus building for the post-retirement years.

The major features of this scheme are:

• A portion of the premium is allocated to provide death benefit ensuring financial security for the policyholder’s dependents.
• The other portion is allocated to investment funds, distributed across equity funds, debt funds or hybrid funds thus allowing policyholders to potentially benefit from market-linked returns.
• The whole life policy has a total tenure of up to 99 years of the policyholder’s age, thus providing a lifetime of protection.
• As with all other ULIP plans, this policy has a lock-in period of 5 years after which the funds can be withdrawn.
• Partial withdrawals are also allowed after the lock in period.
• The corpus built through the ULIP investment can further be used for generating regular income post-retirement.

Thus, Whole Life ULIP Plans cater to long-term financial planning, aligning with retirement goals, life coverage and wealth preservation.

5. Atal Pension Yojana

The Atal Pension Yojana (APY), launched by the Government of India in 2015, aims to provide a steady pension to workers in the unorganized sector. This voluntary scheme encourages individuals to save for their retirement, guaranteeing a minimum pension amount to subscribers based on their contribution and thus ensuring financial stability in their old age.

Important features of Atal Pension Yojana include:

• This scheme is open to all Indian citizens aged between 18 and 40 years. However, it is mainly targeted towards underprivileged and unorganised sector workers.
  
• It is regulated by PFRDA (Pension Fund Regulatory and Development Authority) through the NPS (National Pension System) structure.
  
• Participants can choose a fixed monthly pension amount ranging from ₹1,000 to ₹5,000, according to which they need to pay a monthly contribution amount.
  
• For eligible subscribers, the Government co-contributes 50% of the total contribution or ₹1,000 per annum, whichever is lower, for a period of 5 years.
  
• Subscribers receive a guaranteed minimum monthly pension from the age of 60 years. In the event of the subscriber's death, the spouse can continue the scheme or exit by claiming the corpus.

If you are an individual who wishes to spend their retirement years financially independent, you must consider buying a pension plan.

Here are some major categories of people who must consider investing in a pension plan: 

1. Salaried Individuals

Employees with a regular income can invest regularly in a disciplined manner and thus can benefit from pension plans to secure a stable financial future after retirement.

2. Self-Employed Professionals

Entrepreneurs and self-employed individuals don’t have a reliable income stream and the efforts of earning only decrease as they age. They can invest in pension plans to create a structured retirement corpus, ensuring financial stability when their income may become irregular.

3. Young Career Starters

Starting a pension plan early in one's career allows for the power of compounding to work effectively, resulting in a more substantial retirement corpus.

Believe it or not, early 20s, when you have just started earning is the best time to start investing in a term plan since you have a long time to grow your investment before you retire. The power of compounding is real!

4. Individuals without Pension Benefits

Retirement is a surety and financial obligations too. However, not all employers provide pension benefits. People who don’t have employer-sponsored pension benefits must consider buying a pension plan to fill the retirement income gap. 

5. Individuals Seeking Tax Benefits

Pension plans often come with tax advantages, making them attractive for individuals looking to optimize their tax planning while securing their retirement.

6. Individuals Whose Savings Seem Insufficient

You might have ample savings. However, they might not be sufficient to last till your retirement and suffice for the complete retirement period.

Thus, those concerned about outliving their savings should consider a pension plan, as it provides an income during your retirement years, offering protection against the risk of running out of funds in old age, if properly planned.

Buying a pension plan is a promise for a lifetime. Hence, before making a decision, consider your financial goals and evaluate all other factors.

Here are some of the major factors that you must consider before deciding on a pension plan: 

1. Retirement Age

Plan your retirement age. Consider factors like life expectancy, financial goals, and health conditions. Accordingly choose a plan whose payout period aligns with your retirement age, allowing you to enjoy a comfortable post-retirement life without compromising on financial stability.

2. Premium Payment Period

Evaluate the premium payment period of a pension plan. Choose a duration that fits your financial capacity and retirement timeline. 

If you are nearing retirement, you should obviously choose a shorter premium payment period or immediate annuity plans, and vice versa if you are buying this at a young age. Balancing affordability and coverage are crucial for a sustainable retirement plan.

3. Annuity Conditions

Analyse the annuity conditions of the pension plan that you are considering. Understand the frequency and structure of payouts.

Invest in an immediate annuity if you are nearing retirement, to receive immediate payouts. On the other hand, if you are young, you can choose deferred annuity and let your corpus grow before you start receiving the payouts.

There are other annuity options like life annuity or joint-life annuity etc. Selecting the right annuity conditions ensures a customized income stream tailored to your needs.

Read More: Difference Between Immediate Annuity & Deferred Annuity

4. Sum Assured

The sum assured in a pension plan determines the financial value it provides.

Thus, for deciding the right sum assured, consider your lifestyle, inflation, and anticipated expenses. Know how much you want to receive as a corpus or income when you retire. Estimate your future expenses- regular as well as major ones, whether you will be living in your own home or rented one, which city you will be spending those years, these are some of the factors that can help you determine the right sum assured.

A well-calculated sum assured guarantees a comfortable and stress-free retirement, providing a financial cushion for unforeseen circumstances.

Thus, different pension plans cater to diverse financial needs and preferences. Whether you're a salaried professional aiming for employer-sponsored benefits or a self-employed individual seeking a structured retirement corpus, there is a plan for you.

Regardless of one's risk appetite or employment status, pension plans stand as essential tools for ensuring a stable and stress-free retirement, providing with the much-needed financial security to embrace the golden years.