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Pros and Cons of Retirement & Pension Plans

dateKnowledge Centre Team dateFebruary 25, 2021 views212 Views
Pros and Cons of Retirement & Pension Plans

Retirement planning is very crucial for all individuals. Saving a specific amount of money for retirement is one of the wise financial strategies. A retirement plan is a saving and investment plan that supplements the need for an income after the employee has ceased employment. There are many retirement saving schemes available in the market that offer great benefits to help you achieve your financial goals. However, there are also some risk factors involved that makes us skeptical from investing in them.

Pros of retirement saving schemes

Retirement can last up to 30 years or more, 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 as under:

  • Long-term savings

    Retirement saving plans serves as long-term saving schemes regardless of whether the depositor opts for a lump-sum payment or multiple payments of small amounts. The savings is 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 the safe government securities or in debt and equity investments depending upon the risk profile. These risks are balanced by the prospects of higher returns.

  • Choose how to get paid

    The policyholder or the insurer can either invest a lump sum amount and get annuity payments right away or can choose a deferred annuity plan that ultimately lets the corpus earn more interest until the 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 retirements 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 utilized to generate steady cash flow for recurring expenses.

  • Riders

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

Cons of retirement savings plan

Besides these benefits, there are some drawbacks also. Here are some of the drawbacks of savings plan that one should consider before investing in any of the saving schemes available 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 Rs. 1.5 Lakh.

  • Taxation on annuity

    Whenever the investor receives the annuity after the 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 saving plan that will supplement the needs and requirements of retirement. Before choosing any scheme, one should properly analyze and study the features of each scheme.

Here are the best saving plans and investment option 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 the society by providing them with regular income. This yojana also benefits those working in the unorganized sector.

  • Employee Provident Fund (EPF)

    This savings plan was introduced by the Employee Provident Fund Organization (EPFO) and is initiated by the government. The salaried professional must make an equal financial contribution towards the PF account. This saving 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 and the amount and 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.

  • Deferred annuity

    Deferred annuity plans help in accumulating corpus through single huge premiums or regular small premiums over the term of the policy. The pension begins only after the term overs. Under this scheme, no tax is charged on the money invested until withdrawal.

  • Immediate annuity

    It is one of those types of saving schemes where 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 minimizing tax. This scheme is available through post offices and certified banks of India and offers its investors 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 0 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 Rs. 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 saving 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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Frequently Asked Questions (FAQs) for Retirement and Pension Plans

The premium is one of the most important factors to consider before buying a policy. Many people buy a life insurance policy with a high sum assured but are unable to process the premiums for the entire premium payment tenure. You can get a better idea of the premium outgo with the Premium calculator available in the ‘Tools and Calculator’ section of www.canarahsbclife.com.

The Invest 4G plan offers three benefit options to choose from. If you have opted for the Life Option or Whole Life Option, the insurer will pay the nominee(s) death benefit if the policyholder meets with an unfortunate incident. However, in the Life Option with Premium Funding, the policy continues even after the death of the policyholder. The company pays the remaining premiums until the policy matures.

Life is unpredictable and so it is important to prepare for all eventualities. If you regularly save a substantial amount of your income for retirement, the corpus may expand to a comfortable level before retirement. In case you become disabled and are unable to contribute to the retirement plans, most plans will continue to multiply your savings. The amount already accumulated will continue to grow and besides the existing plans you can also choose to invest in pension schemes specifically designed for people with disability.

Investment in ULIPs like Invest 4G plan qualifies for tax deductions under section 80C of the income tax law. The maturity benefits of ULIPs are also tax-exempt under section 10 (10D) of the Income Tax Act, 1961. However, if the premium paid during the policy term is more than 10% of the sum assured, the maturity proceeds will be taxable.

The concept of early retirement is catching up fast in India, but there are no specified ages for early retirement. While in some western countries the age between 35 and 45 is considered favourable for early retirement, in India the ideal age is 45-50 years. With the right planning and investments, it is not very difficult to retire early.

At the age of 35-40, people generally have several responsibilities such as children’s education and various EMIs. It is difficult to spare a substantial amount of income for retirement. Depending upon the needs of the household and the lifestyle, one should aim to save around 40-50% of his/her income. Around 10% of the income should exclusively be allocated for retirement planning. Here are some tips to choose the best retirement plan.

  • Focus on your needs: It is easier to formulate a strategy when the goal is clear. Make an estimate of the amount required to sustain your life. Take inflation into account and zero in on the targeted corpus.
  • Research thoroughly: Conduct thorough research before investing in any financial product. Read the term and conditions properly and try to understand how an investment product fits your needs.
  • Consider different products: The market is awash with all kinds of investment products. Do not follow conventional advice as the need of every person is different. Take into consideration all the suitable products, conduct an objective analysis and then invest.

Owning a house is a cherished dream for many. There are several ways to save for a new house, but in urgent cases, people may be tempted to withdraw from their retirement fund. There are various financial products for retirement planning, and all have different withdrawal rules. In the case of the National Pension Scheme, partial withdrawals for special purposes like buying a house are allowed only thrice during the policy tenure. However, to avail the withdrawal facility, you should be an NPS investor for at least 10 years and you are permitted to withdraw only 25% of your contribution. If you have a PPF account, you can withdraw 50% of the accumulated amount, but only after staying invested for at least 6 years. The Invest 4G plan also allows partial withdrawals after five years of investment.

The quantum of monthly savings depends on the specific needs of the buyer. Financial advisors, however, suggest people save around 15% of the monthly income for retirement.

Retirement plans such as NPS have a very low entry threshold. It is also open to all and anyone can open an NPS account and start saving. A small business can also invest in Invest 4G plan from Canara HSBC Oriental Bank of Commerce for as low as Rs 5000 every month.

The choice between paying off a student loan or start a retirement account is not a difficult one. Starting early for retirement planning has its own advantages but extending the student loan will increase the interest burden. You will have to find a balance between the two. Try to pay off the student loan as soon as possible, but do not hold back on investing in a retirement account.

Most people nominate their spouse to receive retirement benefits in their absence. But a spouse is not automatically entitled to be the beneficiary of a retirement account owned by the other spouse.

Gold is a safe investment asset and investors often flock to the yellow metal to stabilise their portfolios. Holding a small quantity of gold can be considered as the intrinsic value of gold remains intact. You can also choose to have an exposure to gold through ULIPs. ULIP funds invest in a variety of asset classes and some fund options also have a small exposure to gold. You can choose fund options with gold to have a small and indirect investment in gold.

While there are no explicit rules barring the use of retirement account to finance real estate, it may not be advisable to do so. For instance, you are allowed to avail loan from the PPF account from the third financial year. The loan can be used to finance real estate, but it would defeat the purpose of having a dedicated retirement account.

While there are no explicit rules barring the use of retirement account to finance real estate, it may not be advisable to do so. For instance, you are allowed to avail loan from the PPF account from the third financial year. The loan can be used to finance real estate, but it would defeat the purpose of having a dedicated retirement account.

The government has allowed all central government pensioners to open a joint account with their spouses.

Vesting date or age signifies when your pension plan’s accumulation phase is over and the distribution phase can begin. For example, in a deferred annuity plan, you may have a vesting date which is 10 to 30 years away depending on your age at entry. You will continue to invest or stay invested till the vesting date. After the vesting date or age, you can start receiving the pension or withdraw the money from the plan.

The steps may differ from plan to plan. However, you can buy the online retirement plans following the steps below:

  • Retirement Calculator: Use a retirement calculator to estimate your corpus need and expected monthly investment amount to achieve it
  • Choose Plan: Select the online retirement plan you want to start investing in
  • Contact Information: Fill in the personal details including the contact information. Make sure to put the correct e-mail ID which you can access since all future communication about the policy will take place via e-mail.
  • Define Your Investment: Select the goal, investment term, investment frequency and amount you want to invest (based on the calculator estimate)
  • Select Fund Allocation: Online retirement plans give you the option to invest in multiple assets including equity funds. You can select the ratio in which your premium will be allocated to these funds as per your risk appetite. Then select one of the portfolio rebalancing strategies.
  • Select Withdrawal Plan: You can withdraw money based on set milestone or systematically from the plan after the lock-in period. Select the options for withdrawal as per your plan.
  • Review Plan & Investment Details & Complete the Application Form

You can pay the premium amount before or after completing the application form to start investing.

The best time to plan your retirement is when you are planning your career. However, this may not be the time when you really start investing money for your retirement. You must start investing in your retirement plan as soon as you start earning.

Retirement is the only financial goal you cannot repair with other means of funding like a loan. Thus, developing the habit of investing with every income you have is the best way to have a comfortable retired life.

Insurance allows your family, especially your dependent spouse to continue living without financial worries if anything happens to you. Also, insurance may help you save enough for retirement in case of permanent disabilities. Additionally, life insurance retirement plans allow you to build a good retirement corpus with bonus additions.

Yes, you can change the nominee of the policy anytime you need. If you are using an Electronic Insurance Account (EIA) to manage your policies, you can change the nominees anytime from this account. Otherwise, you can contact the customer care to update the nominations on your policy.

You can opt for auto-debit of the premiums from your savings account. You can also pay the premiums online using your debit card, credit card or a payment wallet.

You can get Rs. 1 Core pension plan using the online retirement calculator. The calculator will assess your eligibility and provide you with the probable monthly or annual investment to achieve the goal. If the amount seems feasible you can complete the purchase online or set an appointment for a qualified advisor to help you in the process.

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