Pension plan or retirement plan are a type of investment plan, which helps you to accumulate a part of your savings over a long-term period so that you can have a secured financial future. Pension Plan helps you to deal with the uncertainties post-retirement and ensures a steady flow of income after retirement.
There are various types of such plans available in the country offered by various companies. However, increased choices may confuse and person and make it difficult for individuals to choose one which works the best.
What are different types of Pension Plans?
Pension Plans With/Without Life Cover
Immediate Annuity and Deferred Annuity
Traditional pension plans and Unit Linked pension plans
Pension plan with /without life cover: Pension plans with life insurance cover offers an assured life cover (i.e. sum assured) in case of death during the accumulation phase (policy term).
Pension plans without life cover, pay out the corpus built till date to the nominees in case of death of the policyholder during the policy term. There is no life cover (sum assured) in these plans.
Immediate Annuity and Deferred Annuity: In case of Immediate Annuity plans, the premium amount is paid in one lump sum and the annuity/pension commences immediately after paying the premium depending on the payment frequency (Monthly, quarterly, semi-annually or annually).
In case of Deferred Annuity, a policyholder pays a regular premium for a certain number of years. This is called the accumulation phase. The money that has accumulated at the end of the accumulation phase is used to buy immediate annuities, which, in turn, generate a regular income for life. For example, if an individual buys a pension plan with tenure of 30 years then his annuity will begin at the end of the 30th year. So deferred annuities are like any other investment product that help you build a corpus by investing regularly.
Traditional pension plans and Unit Linked pension plans: During the accumulation phase the individual can choose to invest in a traditional pension plan or a unit-linked pension plan, based on their risk appetite. A traditional pension plan invests most of the funds in Government securities, whereas in a unit-linked retirement plan the investment is in a combination of stocks, bonds, securities, etc.
Most people think about retirement and pension plan when they are 45. This is a common case. In most cases, it may be too little too late. At this stage, investing even large sums of money is of limited help. For instance: If the target amount is Rs.1.5 crore at retirement, the amount to be committed per month (assuming 10% return throughout the period) for someone who wants to invest for 30 years is about Rs.7000 per month. For someone who has only 15 years to go, it may be close to Rs.37,000 per month. This is due to the compounding effect of the invested amount.