Pros and Cons of Retirement & Pension Plans

Pros and Cons of Retirement & Pension Plans

Retirement planning ensures financial security. Explore the pros and cons of pension plans and top investment options for a stable future.

Written by : Knowledge Centre Team

2026-01-30

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10 minutes read

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Retirement planning is very crucial for all individuals. Saving a specific amount of money for retirement is one of the wisest financial strategies. A retirement plan is a savings and investment plan that supplements the need for an income after the employee has ceased employment. 

With increasing life expectancy and rising living costs, having a reliable retirement corpus has become more essential than ever. While there are numerous retirement savings schemes available in the market that offer attractive benefits, potential returns, and tax advantages, they also come with certain risks. These risks often make individuals hesitant to invest, highlighting the need for careful planning, awareness, and informed decision-making in retirement planning and towards their financial goals.

Key Takeaways


  • Contributions to schemes like NPS, EPF, and PPF qualify for deductions under Sections 80C and 80CCD, helping reduce your taxable income
  • Regular pension payouts are treated as income and are taxable as per your income slab
  • Government-backed schemes like EPF and SCSS are ideal for risk-averse individuals
  • Deferred annuity plans let you grow your retirement corpus before starting payouts
  • Investments like NPS equity funds or pension funds can generate higher growth potential, but are subject to market volatility

What are Retirement Saving Schemes?

Retirement savings schemes in India, such as the National Pension System (NPS), Senior Citizens Savings Scheme (SCSS), and Public Provident Fund (PPF), provide structured, tax-efficient methods to build a corpus for post-retirement life. These programmes range from government-backed, fixed-income options to market-linked plans, generally allowing for withdrawals and annuities after age 60, aimed at ensuring financial security.

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Pros of Retirement Saving Schemes

Retirement can last for a long period, and thus having a good amount of money to suffice the need for retirement expenditures is a must. There are many benefits of a retirement savings plan; some of which are discussed below:

  • Long-term Savings: Retirement savings plans serve as long-term savings schemes regardless of whether the depositor opts for a lump-sum payment or multiple payments of small amounts. The savings are assured. These plans also create an annuity that can be further invested to give rise to a steady flow of cash post-retirement.

  • Option for Investment: Not only do these plans serve the need of an income for retirement, but the funds can be further used to invest in either safe government securities or in debt and equity investments, depending upon the risk profile. These risks are balanced by the prospects of higher returns.

  • Flexibility to Choose How to get Paid: The policyholder or the insurer can either invest a lump sum amount and get annuity payments right away, or choose a deferred annuity plan that ultimately lets the corpus earn more interest until withdrawal.

  • Life Insurance Cover: Investors can get a lump sum amount when they retire or in case of the demise of the individual, whichever occurs earlier, thus acting as a life insurance cover.

  • Negate the Effect of Inflation: Pension plans for retirement are designed to negate the effect of inflation. Some part of the corpus is offered as a lump sum payment at retirement, and some part is utilised to generate a steady cash flow for recurring expenses.

  • Riders: The pension policy can be tweaked to get the lump sum payment on retirement or the death of an individual.

Cons of Retirement Savings Plan

Besides these benefits, there are some drawbacks of a savings plan that one should consider before investing in the market for retirement:

  • Limited Deduction Allowed: Many plans and policies only allow a limited deduction on the tax. The maximum deduction allowed on life insurance premiums under the Income Tax Act, 1961, is ₹1.5 lakh.

  • Taxation on Annuity: Whenever the investor receives the annuity after retirement, it becomes taxable as of that date.

  • High Risks for High Returns: Many policies and plans are subject to market fluctuations and have higher risks. To receive higher returns on the amount, people mostly opt for high-risk options whose continuity and steadiness cannot be predicted.

Top Investment Options in India

The main thing that one should consider is choosing the best savings plan that will supplement the needs and requirements of retirement. Before choosing any scheme, one should properly analyse and study the features of each scheme.

Here are the best savings plans and investment options for people who want a sufficient income for their retirement:

  • Atal Pension Yojana (APY): It is one of the most effective saving schemes initiated by the government, which is specially designed for the welfare of the weaker section. The premiums for this scheme are low, and the benefits are high. Atal Pension Yojana is a robust retirement plan that benefits the weaker section of society by providing them with regular income. This yojana also benefits those working in the unorganised sector.

  • Employee Provident Fund (EPF): This savings plan was introduced by the Employee Provident Fund Organisation (EPFO) and is initiated by the government. The salaried professional must make an equal financial contribution towards the PF account. This savings cum retirement option helps individuals to plan for retirement well in advance. Under this saving scheme, both the employee and the employer make an equal contribution to the account.

  • Recurring Deposits (RD): RD is a term deposit that banks offer in which one can regularly deposit money and get a huge return at the time of maturity. Depositors are allowed to choose the term period, the amount, and the monthly deposits as per their wish. RDs also allow higher rates of interest for senior citizens and can also be used as collateral for taking loans.

  • National Pension Scheme (NPS): This pension scheme aims at providing security and stability during old age. It was introduced and is managed by the Government of India. The money invested is further put in equity and debt funds to generate returns on the investment. The maturity proceeds of this retirement savings plan are not tax-free.

  • Pension Funds: It is a type of pension scheme that remains in effect for a long period. This scheme offers much better returns upon maturity.

    1. Deferred Annuity: Deferred annuity plans help in accumulating a corpus through single huge premiums or regular small premiums over the term of the policy. The pension begins only after the term ends. Under this scheme, no tax is charged on the money invested until withdrawal.
      Also Read - Deferred Pension

    2. Immediate Annuity: It is one of those types of saving schemes where the pension begins right away, as soon as the money is deposited. Under the Income Tax Act of 1961, the premiums are exempted from tax. After the demise of the policyholder, the nominee receives the money.

  • Senior Citizen Savings Scheme (SCSS): The Senior Citizen Savings Scheme is an ideal option for those retirees looking for less risky products and focusing on minimising tax. This scheme is available through post offices and certified banks of India and offers its investors a secure and regular income. It is an excellent tax-saving investment plan. Senior citizens who are at least 60 years old are eligible for the scheme, and individuals between 55 to 60 years of age who have opted for the Voluntary Retirement Scheme, or superannuation, can also invest in this scheme.

The average tenure of this savings plan is 5 years, and it can be extended further for three more years, as per Section 80C of the Indian Income Tax Act. A tax deduction of up to ₹1,50,000 can be claimed. Premature withdrawals are also allowed with a penalty.

The retirement savings plan is supposed to be for retirees who aren’t high-risk tolerant. Start investing in these retirement and pension plans to enjoy a stress-free retirement period. Choosing the best savings plan is crucial as it creates a secondary income stream, making it smooth for you even after you retire from your work.

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Did You Know?

Under NPS, up to 60% of the corpus at maturity can be withdrawn, with 40% fully tax-free if used for annuity purchase


Source: NPS

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Taxation of Pension Plans in India

When it comes to retirement, taxes can quietly eat into your savings if not planned right. While pension plans offer long-term benefits, the way they’re taxed in India varies from one scheme to another, and timing plays a big role.

  • Tax Breaks on Contributions: Schemes like NPS, EPF, and PPF allow tax deductions under Sections 80C and 80CCD. NPS gives an extra ₹50,000 deduction over the regular ₹1.5 lakh limit. If your employer contributes to NPS, that’s also tax-deductible without eating into your personal limit.
  • Tax on Withdrawals & Pension: Here’s the catch: pension income (annuity) is fully taxable as per your income slab. Lump sum withdrawals may be partly tax-free, depending on the scheme. For example:
    1. In NPS, 40% of the corpus is tax-free; the rest is taxable unless used to buy an annuity
    2. In EPF, withdrawals after 5 years are tax-free
    3. SCSS interest is taxable but offers a steady post-retirement income

Most annuity incomes, whether from deferred or immediate plans, are added to your taxable income each year. They’re safe but not tax-free.

Conclusion

Retirement planning is not just about saving money; it is about creating financial independence for your later years. By understanding the pros and cons of pension plans and evaluating the right retirement savings options, you can build a stable income stream that supports your lifestyle long after your working years end.

At Canara HSBC Life Insurance, our retirement plans are carefully designed to accommodate a steady income, banking protection, and tax benefits, authoritatively rewarding your retirement years.

Glossary

  1. Annuity: A fixed sum of money paid to someone each year, typically for the rest of their life
  2. Corpus: The total amount of money accumulated in your retirement account
  3. Deferred Annuity: A plan where payouts begin after a certain term
  4. Immediate Annuity: A plan where payouts start right after investment
  5. EPF (Employee Provident Fund): A retirement savings plan with equal contributions from the employer and employee
  6. Lock-in Period: The mandatory duration during which funds in a retirement savings plan cannot be withdrawn without penalty
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FAQs

A retirement savings plan helps you build a secure financial future by offering tax benefits and long-term income post-retirement. It ensures you're covered even when your active income stops.

Not entirely. For example, NPS allows up to 60% withdrawal at maturity, out of which 40% is tax-free. The remaining amount and annuity payouts are taxed per your income slab.

Advantages include tax savings, market-linked growth, and retirement income. However, limited liquidity and partial taxation during withdrawal can be considered disadvantages.

When comparing the pros and cons of different retirement savings plans, pension plans provide predictable income and stability, while market-linked retirement plans like NPS or mutual funds offer higher growth potential but carry volatility risk. The right retirement savings plan depends on your risk appetite, income needs, and long-term goals.

liquidity, taxation on annuity income, and modest returns in traditional plans are key concerns of pension plans. Unlike aggressive market-linked options, fixed pension schemes may not always fully beat inflation.

Before selecting a retirement plan, consider your age, risk tolerance, expected retirement expenses, tax benefits, lock-in period, and payout flexibility. Evaluating the advantages and disadvantages of retirement plans carefully helps you choose a structure that balances growth, safety, and post-retirement income stability.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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