Pension Plans India

Finance » Pension

Pension is a fixed amount of money that is paid to a person after retirement. This can be done either by the employer for whom the person worked previously. It can also be made by the insurance company if the person had invested in a pension plan of that company. In India the government employees are entitled to get pension from the government in fixed installments. Those who work in private companies or are self employed invest in pension plans offered by various insurance companies.

A person usually has two phases of investment; the accumulation phase and the distribution phase.

  • Mutual FundsAccumulation phase: this is the phase when you earn money and accumulates wealth. During this period you tend to invest in various kinds of investment plans like mutual funds, stock market, securities, bonds, life insurance, pension plans etc.
  • Distribution phase: this is the phase when you tend to consume the wealth you have already accumulated. This is usually when you have retired from your job. Some of you might start withdrawing money even before retirement.

Types of pension plans:
There are different types of pension plans. It would depend on how much you earn today and how much you would like to invest in pension plans, apart from other types of investments. The various types of pension plans can be categorized as follows:

Deferred Annuity Plan:

As the name suggests, the pension is not paid immediately after you retire but it is delayed till the time you plan to retire. You pay a fixed amount as premium and the wealth accumulated is kept aside till you retire. You get your money back in regular installments every month. If you have taxable income and are investing this kind of scheme, then after this scheme starts generating a fixed income post retirement, it is given to you after tax deductions.

Immediate annuity plan:
You can invest a lump sum amount of money in this plan. When you retire, you get a fixed amount of money for a fixed amount of time as long as you live. There are different types of plans that insurance companies offer. They are as follows:

  • Guaranteed Period Annuity: As the name suggests, you get a certain amount of money for a fixed number of years as mentioned in the pension plan. So if someone decides to buy this plan and get pension for 15 years, the money will be paid irrespective of the fact that the person survives or not after this plan. For example, if the policy holder expires after 10 years, the money will be given to the nominee for the next 5 years.
  • Annuity Certain: If you buy this plan, you will be paid a fixed amount of money for a fixed duration. However, the best advantage of this plan is that if you survive the plan you would get pension for as long as you live. For example, a a person invests in this plan and is supposed to receive money for the next 15 years. If after 10 years, he dies the nominee will get the pension for the next five years and then the pension will stop.
  • Life Annuity: If you opt for this plan, you will get pension for as long as you live. If the person dies, then the nominees will get the purchase price of the annuity. The purchase price here means the assured amount to be received on maturity, plus the bonus.

Importance of Pension Plan:
Decline in joint family system: In India parents relied on their children to take care of them after their retirement. However, this convention has undergone a sea of change in the past few decades. The skilled, semi-skilled and the unskilled labor prefer to or are forced to work in cities where they get better employment opportunities and have to leave their parents in 'empty nests'. This has increased the need to invest in pension plans.

  • Reduced Dependency: Besides, if you accumulate sufficient wealth for your retirement, you can lead the same kind of lifestyle you lived before your retirement, without being dependent on anyone. If your children are unable to support you, you would be able to rely on pension.
  • Increase in life expectancy: Recent surveys reveal that the life expectancy of people in India has increases by 4.5 years in the past few years. So in order to provide for yourself during you old age, you need to invest in pension plans.
  • Increase in aging population: although India is said to be a country with a huge young population, this will not be the same after a few decades. This generation will age and will need to provide for themselves.

Although life insurance provides coverage for you and your dependents in case of an occurrence of an eventuality like death, pension plan provides you coverage if you have to survive your old age without depending financially on anybody. The main reason for this is that you may not be able to support for yourself financially after a certain age. It is then that your pension plans will help you.