A pension is a type of retirement plan that provides monthly income once you retire. Here, your employer contributes money to the pension plan while you are working. The money then is paid to you, usually as a monthly check, after you reach a specific retirement age.

 

how-pension-plan-works

 

However, not all employers offer pensions. Government organizations usually offer a pension, and some large companies offer them too.

In addition to an employer’s required contributions, some pension plans have a voluntary investment component. Here, a worker can contribute part of his current income into an investment plan to help fund retirement.

 

Features & Benefits of Pension Plans

1. You can get a fixed and steady income after retiring ensuring a financially independent life after retirement.

2. Some plans provide tax exemption specified under Section 80C.

3. Some plans allow withdrawal even during the accumulation stage. This ensures funds to fall back on without having to rely on bank loans etc.

4. An investor can either choose to pay the premium in periodic intervals or at once as a lump sum investment. The wealth will simultaneously accumulate over time to build up a sizable corpus (investment + gains).

 

How does a typical pension plan work?

A typical pension plan starts with the ‘accumulation phase’—the period from the time you buy a plan until you retire. During this period, you will be paying premiums, which will be suitably invested. The premiums that you pay will be eligible for tax benefit under Sections 80C/80CCC.

When you retire, you can withdraw 1/3rd of the accumulated corpus. This withdrawal is tax-free. The balance amount cannot be withdrawn. It has to be utilized to buy an annuity plan. This annuity plan will be the source of regular pension until your death. This is called the ‘annuity phase’. The pension that you receive will depend on the interest rates then prevailing and is fully taxable.

 

Tips to remember before buying a Pension Plan

a. Estimate your future financial goal(s)
b. Consider your current income and fix an amount to invest in the plan
c. Research the available plans, read the benefits offered post maturity and choose accordingly
d. Understand the product thoroughly and then decide on investing
e. Do not choose a product only because of tax benefits