Planning for retirement is a crucial aspect of everybody’s lives. Considering the rising inflation level and limited social security initiatives for senior citizens, it is vital that you start planning your retirement early. This article covers the following:
Latest Update
Latest update:
The CBDT notifies Form 12BBA, a declaration form, to be submitted by the eligible senior citizens to the specified banks to take relief from filing the ITR.
In Budget 2021, it has been proposed to exempt senior citizens from filing income tax returns if pension income and interest income are their only annual income sources. Section 194P has been newly inserted to enforce that banks deduct tax on senior citizens of more than 75 years of age who have a pension and interest income from the bank.
Pension Plans
Pension or retirement plans offer the dual benefit of investment and insurance cover. By investing a certain amount regularly towards your pension plan, you will accumulate a considerable sum in a phase-by-phase manner. This will ensure a steady flow of funds once you retire.
Public Provident Fund is one of the most popular retirement planning schemes in India. When you start contributing to your retirement early, the funds build a secure golden year money-wise over the years. A well-chosen retirement plan can help you rise above inflation, thanks to the power of compounding.
Who should opt for Pension Plans?
Every individual should invest in pension plans to secure their retired life financially. Section 80C of the Income Tax Act, 1961, covers several retirement plans and taxpayers are eligible for tax deductions of up to Rs.1.5 lakh. Any plan you choose must be in sync with your investment goals (or retirement plans). For example, if you wish to retire early, then your corpus upon maturity should be enough to support your retired life. Hence, the key is to choose the retirement plan smartly.
Features & Benefits of Pension Plans
Guaranteed Pension/Income
You can get a fixed and steady income after retiring (deferred plan) or immediately after investing (immediate plan), based on how you invest. This ensures a financially independent life after retiring. You can use a retirement calculator to have a rough estimate of how much you might require after retiring.
Tax-Efficiency
Some pension plans provide tax exemption specified under Section 80C. If you wish to invest in a pension plan, then the Income Tax Act, 1961, offers significant tax respite under Chapter VI-A. Section 80C, 80CCC and 80CCD specify them in detail. For instance, Atal Pension Yojana (APY) and National Pension Scheme (NPS) are subject to tax deductions under Section 80CCD.
Liquidity
Retirement plans are essentially a product of low liquidity. However, some plans allow withdrawal even during the accumulation stage. This will ensure funds to fall back on during emergencies without having to rely on bank loans or others for financial requirements.
Vesting Age
This is the age when you begin to receive the monthly pension. For instance, most pension plans keep their minimum vesting age at 45 years or 50 years. It is flexible up to the age of 70 years, though some companies allow the vesting age to be up to 90 years.
Accumulation Duration
An investor can either choose to pay the premium in periodic intervals or at once as a lump sum investment. The wealth will simultaneously accumulate over time to build up a sizable corpus (investment+gains). For instance, if you start investing at the age of 30 and continues investing until you turn 60, the accumulation period will be 30 years. Your pension for the chosen period primarily comes from this corpus.
Payment Period
Investors often confuse this with the accumulation period. This is the period in which you receive the pension post-retirement. For example, if one receives a pension from the age of 60 years to 75 years, then the payment period will be 15 years. Most plans keep this separate from accumulation period, though some plans allow partial/full withdrawals during accumulation periods too.
Surrender value
Surrendering one’s pension plan before maturity is not a smart move even after paying the required minimum premium. This results in the investor losing every benefit of the plan, including the assured sum and life insurance cover.
How a Retirement Plan Works
Example:
Priyanka is 32 years old with an expected lifespan of 80 years. Her current salary is Rs.50,000 and she wishes to retire at the age of 60. She is looking for a monthly pension of Rs.30,000 post-retirement. How much do you think she should invest until the age of 60 to meet her investment goals?
Priyanka will need a corpus of Rs.4.05 crores to receive an income of Rs.30,000. Let us assume a long-term return of 12% till age 60 and 5% after that, with 6% inflation rate. Based on these figures, she must invest Rs.14,820 monthly for the next 28 years. If all goes according to plan, Priyanka is going to lead financially secure golden years. You may also use this retirement planning calculator to arrive at a number.
Pension Plan Types in India
It is never too early or late to start investing in retirement plans. However, it is sooner, the better. Whether you are salaried or entrepreneurial, there is a slew of pension plans you can choose from as listed below.
| SL No. | Plan Type | In Detail |
| 1 | Deferred Annuity | Systematic premium or one lump sum premium over the tenure Pension begins after completing the term No taxation (unless you withdraw the corpus) |
| 2 | Immediate Annuity | Only lump sum investment allowed Pension begins immediately after investment Income tax exempts tax on the premiums The nominee can claim the pension or the corpus after the passing of policyholder |
| 3 | Annuity Certain | The pension is disbursed for a specific period The policyholder can choose a period (say, age 65-70) The nominee can claim the pension after the demise of the policyholder |
| 4 | With Cover Pension Plan | Comes with a ‘cover’ policy – policyholder’s dependents are entitled to a lump sum after he/she expires The insurance amount is not large a most of the premium goes towards building the corpus |
| 5 | Life Annuity | Pension paid till death ‘With spouse’ option – spouse continues to receive after the policyholder’s demise |
| 6 | National Pension Scheme (NPS) | Launched and managed by the Central Government Your money will be distributed in equity and debt markets as your preference. Withdraw 60% when you retire, and the rest should be used to buy the annuity The tax levied on the 20% of the corpus you withdraw upon maturity |
| 7 | Pension Funds | Better returns once it matures Regulated by the government body, Pension Fund Regulatory & Development Authority (PFRDA) Currently, six fund houses in India are authorised to offer pension funds. Example, SBI |
| 8 | Guaranteed Period Annuity Plan | Annuity disbursed for specific terms like 5 to 20 years. |
Tips to remember before buying a Pension Plan
- Estimate your future financial goal(s)
- Consider your current income and fix an amount to invest in the plan
- Research the available plans, read the benefits offered post maturity and choose accordingly
- Understand the product thoroughly and then decide on investing e. Do not choose a product only because of tax benefits If you think any of the pension mentioned above plans suit your investment goals and current income, then start investing!