Pension plans or retirement plans are a kind of investment plans where you pay the premium when you are earning and reap the benefits when you have retired. So, this helps you with constant income flow even when you are no longer in the position to work.
Investing in pension plans have 2 phases the accumulation phase and the distribution phase. During the accumulation phase, one grows the money by giving premium from their monthly earnings. On the vesting day, that is the day when you start receiving the money back, the accumulated sum through your premiums is given back to you.
We generally buy a life insurance policy for those who are dependent on us but to take care of our needs after retirement. We need to invest in pension plans.
So, every individual who needs to be financially independent post-retirement should invest in the pension plans. Investing in pension plans also come with an added benefit.
Whatever you invest in any pension plan should be in sync with the post-retirement goals like if you plan to retire early, your accumulated corpus should be such so that it can support your post-retirement life properly.
Hence the key is not to choose the pension plan but to choose the right pension plan, and here are the reasons why an individual need to choose a retirement plan.
Fixed Income
You can get a guaranteed income post-retirement if you invest in any of the pension plans. The amount that you receive post-retirement would differ depending upon the plan that you have chosen.
Tax Benefits
Some pension plans have tax exemption under Section 80 C. There are also pension plans which provide tax deduction under Section 80 CCD like Atal Pension Yojana, and National Pension Scheme (NPS).
Low Liquidity
Pension plans have very low liquidity, that means you cannot withdraw the amount anytime. However, a few pension plans allow you to withdraw a certain sum after a certain period of accumulation. Such pension plans can help you to rely on, during the phase of an emergency.
Flexible Vesting Age
In case of pension plans, you can choose the vesting age that is from 45 to 55 or in some cases the funds allow you with vesting age till 70 and in some cases 90.
Premium Payment Method
One can either choose to pay the premium in a lump sum or in periodic intervals. The corpus that is accumulated, includes the amount plus the gains. Like if you start investing from the age of 30 and invest till the age of 50 you have accumulated capital for over 20 years. When you receive the pension, you get it from this accumulated fund.
Other than the reasons, there are a few benefits of investing in pension funds.
Investing in pension funds inculcate the habit of being a disciplined investor and build in a sizeable corpus with just a small and regular investment.
With pension funds one can gain from compounding, so the longer one stays invested, the larger is the corpus.
Also, insurance-led- pension plans help you to provide financial protection to your family in your absence.