You should never take future savings lightly. Pension plans are highly effective ways to ensure a fixed income once you retire. However, with rapid growth in the pension scheme space, there is more confusion for first-timers, particularly since there are more choices available to them. How do you choose the best plan that is tailored to your needs? Read on for more below.
Knowing More about Pension Plans?
To simplify it, pension plans are basically schemes for retirement. When you are working, you will regularly invest a sum of money from your income for your retirement. The corpus you accumulate from the regular savings then provides for income later in your retirement, when you stop earning. Thus, you may consider it passive income once you retire from the workforce. You will find numerous types available, ranging from pension plans supported by the Government to private bank or financial institution plans and those offered by insurance companies.
Pension Plans from the Government
In India, the government provides various retirement schemes. Some choices include the NPS (National Pension System) and even the EPF (Employees Provident Fund). The latter involves equal contributions made by both employers and their employees, while the former involves contributions made steadily throughout your work tenure. They are both risk-free options for building a retirement corpus.
Also Read: Looking To Invest in ELSS to Save Tax? Know Things to Consider Before Choosing
Private Companies
Many insurance companies and mutual funds offer retirement pension plans. In these pension plans, you get to choose the portfolio, taking complete control over investment and saving. Among common choices, Unit-Linked Pension Plans (ULPPs) and regular pension schemes, which guarantee a certain return, are quite popular.
Annuities and Deferred Annuities
An annuity is yet another way to provide yourself with a guaranteed pension. In an immediate annuity, you put in a lump sum, and payments start immediately- usually within one year. With a deferred annuity, you set aside savings during your period of insurance, which are then converted into an annuity following retirement.
Important Concepts to Know About Pension Plans
For people unaware of pension plans, there are many unknown concepts, such as the following.
- Corpus: The full amount you have managed to accumulate from your investments over time, which pays off as a pension at the end.
- Annuity: A series of regular payments to you from your pension corpus.
- Vesting Age: The age at which you begin to draw on your pension. Usually, for most plans, this is somewhere between 55 years and 65 years.
- Fund Management Charges: The commission charged by the agent of your pension fund for running your investment.
Do You Need a Pension Plan?
By investing in a pension scheme, you can create a substantial corpus thanks to many years of compounding interest. Pension plans are an important tool in retirement planning. By understanding both the various types available and their important aspects, you can choose a plan that suits your financial goals. So, start early, invest wisely and become retirement-ready.
