Retirement planning is very important if you want to live a financially independent life after retirement. When you no longer work and there’s no income flowing into your bank account, it’s difficult to maintain the current standard of living. Therefore, retirement planning is crucial in maintaining the lifestyle you currently lead, even after retirement.
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To plan your retirement, you need to know:
Once you are clear, you can start investing in line with retirement goals and risk tolerance. Achieving what you anticipate for your retirement is difficult if you don’t plan and manage finances well.
The first step in retirement planning is to start investing. There are a number of retirement plans also known as pensions plans in India that help you achieve retirement goals, if you invest religiously. Let us check out the types of retirement plans:
Broadly, there are three types of pension plans:
These pension plans are also called personal pension plans. These pension plans can be availed through life insurers. Personal pension plans are not linked to your employer, therefore, your employer will not contribute to this investment.
There are three types of personal pension plans:
To better understand a deferred annuity plan, let us break it down. ‘Deferred’ means ‘to delay’. Annuity means ‘fixed payout for the rest of the life’. Therefore, in a deferred annuity plan, you decide a future date from when you want to start receiving the annuity payments.
Example: A deferred annuity plan for a term (deferment period or vesting age) of 25 years will begin only after 25 years. It means you will contribute premiums for 25 years and receive annuity after 25 years. You can choose to pay ‘single premium’ or a ‘regular premium’.
In a deferred annuity plan, there are two phases: accumulation phase and income phase. At the end of accumulation phase, you can withdraw 1/3rd of the corpus and buy an annuity plan with the remaining 2/3rd of the corpus. You can claim tax benefits under Section 80CCC for an investment in annuity. However, the pensions are taxed.
Deferred annuity plans are of two types:
The contribution or premiums paid towards these plans are mostly invested in debt instruments like government securities. These are best suited for risk-averse investors because of associated low risks.
In ULIPs, you can choose to allocate your investment in different asset classes like equity, debt, or a mixture of both. Based on your choice of asset class, you will have to assume high or low risk. Based on the risk, you will earn high returns or medium returns.
In immediate annuity plans, you start receiving annuity payments immediately. For this, you are required to pay a ‘lump sum premium’ after which you will start receiving the annuity payments immediately or after a year of paying the premium. You can choose the payment frequency to be monthly, quarterly, half-yearly or yearly.
Pension plans or retirement plans with life cover pay the sum assured to the nominees if the policyholder dies during the accumulation stage. Pension plans without life insurance cover, only pay the corpus built (contribution made) till date with interest (as decided by the insurer) to the nominees in case the policyholder dies during the accumulation stage.
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Non-insurance based pension plans are better known as work-based pension plans. These pension plans are set up by the employer to help employees save for retirement. In this pension plan, both the employer and employee contribute to a retirement fund on a monthly basis. Your contribution is directly deducted from the salary.
In this plan, the benefits are calculated based on factors like years of service left and salary.
In this plan, the benefits are calculated based on employee’s and employers monthly contributions and the performance of investments made with such money.
This is a mixture of defined benefit and defined contribution pension plans.
The government has launched various retirement plans (pension plans) for social security. Some of them are:
EPF is available to all salaried employees subject to the rules laid down by EPFO. In this case, the employer and employee contribute a percentage of employee’s salary to the employee’s EPF account.
PPF is a popular long-term investment option which offers capital preservation and attractive interest rates. PPF has the EEE status. A minimum of Rs 500 to a maximum of Rs 1,50,000 can be invested each financial year.
Contributions to NPS can be made from a young age of 18. NPS offers investors: the active choice and auto choice. In active choice, 50% of the contribution is invested in equity, while the rest is in government and corporate bonds. In auto choice, investments are made in a mix of equity, corporate and government bonds, depending on your age.
You can claim a tax deduction under Section 80C and an additional deduction under Section 80CCD (1B). On retirement, you can withdraw 60% of the corpus and are required to buy an annuity with the remaining 40%. Out of the 60% withdrawn, 40% is tax-free.
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