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Pension Plans for Retirement

Have you heard the famous saying “Time is no longer money”. This stage happens only once in life. Your retirement. Retirement is a time you no longer have to worry about reaching your office in time or finishing all those projects with deadlines. This is a time of bliss. Rolling on the beach sands or pursuing hobbies and interests which were but a dream for many years.

Perhaps time to bring out that camera and take photographs of nature in all its glory. The setting sun captured on camera or the slow flowing river. Time to take your grandchildren to the zoo and spend quality time with them which you could not do all these years. Money….This is what helps you achieve all this and there is nothing better than a pension plan for retirement to get you there.

What are pension plans?

In a pension plan you have to invest money each month in your working years. This helps to build a corpus (lump sum) basically a huge amount of money for your retirement. On retirement this money is used to pay you a pension (sum of money) maybe monthly, quarterly or yearly.

Accumulation phase
This is the time (your working years) when you invest money in a pension plan to build a corpus which you can use in your retirement years. This money is collected until your retirement called the vesting age.
(Vesting age = retirement age).

Distribution phase
This is the time when after the vesting age the amount collected is paid to you as a pension. The pension is paid on a monthly, quarterly or a yearly basis.

How does a unit linked pension plan work?

Working during the accumulation phase

  • You have to invest a fixed sum of money each month in a unit linked pension plan in your working years.(Accumulation phase)
  • This amount is then invested in equities (Shares or an equity mutual fund) and you are assigned units based on the amounts you invest.
  • Your returns increase or decrease based on stock market fluctuations. If the stock markets go high your returns are high and if the stock markets go low your returns are low.

Lock in
Your money is locked for a period of 5 years. You cannot touch the amount invested in a unit linked pension plan for a period of 5 years. You cannot surrender the unit linked insurance policy before a period of 5 years.
Similar to the charges of the unit linked insurance plans

  • Premium Allocation Charges
  • Mortality Charges
  • Fund Management Fees
  • Policy and Administrative Charges
  • Surrender Charges
  • Fund Switching Charges and Service Tax

Working during the distribution phase

You have a vesting age or the age when you retire. At this age the distribution phase begins. This is commonly 60 Years of age. Commutation Out of the money which is collected till your retirement age (60 years) about a third (1/3rd) of the amount is paid to you on retirement. This is commutation The remaining amount (2/3rd) of the corpus (Lump sum collected) is compulsorily invested in an annuity policy. The annuity policy pays you a sum of money on a monthly, quarterly or a yearly basis. Tax benefits
The premiums (amounts you invest) in a unit linked pension plan are tax deductible under Section 80 C of the income tax act up to INR 150000. You receive 1/3rd of the lump sum on retirement. This amount is tax free. The remaining amounts are commuted (Compulsorily invested in a annuity plan) and these amounts you receive from your annuity plan are added to your other income and taxed as per the tax slab you fall under.

Insurers offer pension plans called annuity plans

What are annuity plans?
Insurers offer a unique pension plan called annuity plans. These may be classified as immediate annuity plans and deferred annuity plans.

Immediate annuity plans
You pay a lump sum (a huge amount of money) to the Insurer (Insurance Company) as a premium and you get your pension payments immediately paid on a monthly or a quarterly basis. This could be a month or a year after the annuity policy is purchased.

Deferred annuity plans
In a deferred annuity plan you have to build the corpus (lump sum amount) which you then invest in an annuity plan. This corpus can be built through a pension plan where you invest small amounts each month (accumulation phase) and once a huge sum of money is collected a deferred annuity plan is purchased.

How do annuity plans pay you your pension?

Life annuity without return of purchase price The annuity pays you a monthly or quarterly amount as long as you are alive. The payments stop on your death. The Insurer takes a bet on how long you would live. This risk is spread across a pool (a number of investors who invest in the annuity plan). The Insurer makes his money based on how long you would live after your retirement age.

Suitability : Highly suitable if you are single and have no dependents. Life annuity with return of purchase price The annuity pays you a monthly or quarterly amount as long as you are alive. On your death your dependents get the purchase price paid for the annuity. This is the sum assured under the policy, the guaranteed additions in the policy (a sum of money is given after each year for a fixed time say 5 years as a percentage on the sum assured) and also any bonuses that accrue in the policy.

Suitability : This policy can be used to leave money for your dependents. Annuity guaranteed for certain periods The annuity pays you for a fixed time period say 5 years , 10 years or 20 years .The amounts are paid irrespective of whether you survive or not for the decided time say 20 Years. Suitability : This policy is useful if you are at high risk (Cardiac problems and other major health issues lead to a short lifespan).

Joint Life Last Survivor Annuity With 50% Pension for Spouse

On your death the annuity plan pays your spouse 50% of the amount it used to pay you as an annuity until her (spouses) death.

Joint Life Last Survivor Annuity with 100% Pension for Spouse

On your death the annuity plan pays your spouse 100% of the amount it used to pay you as an annuity until her (spouses) death. So choose your pension plan wisely... Have great retirement years.....

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