Before you buy any pension plans, it’s very important for you to know how they work, as well as the tax benefits they offer.
After retirement, everyone needs a constant money flow of money to maintain their lifestyle. There are different types of pension plans in India that is offering by many private and public insurance companies. Pension plans cover your post-retirement expenses and also offer various tax benefits. Here’s your introduction to pension plans.
What are the pension plans?
Pension plans are also known as annuity plans. They provide a regular source of income for pensioners. Policyholders can choose the date from when they can begin to receive the pension.
Pension plans cover your post-retirement expenses and also offer various tax benefits. Here’s your introduction to pension plans.
In an immediate annuity plan, a person requires to make a single lump sum investment. They will then receive a periodic payout known as pensions for the remainder of their lifetime.
How frequently are pension payments made? The frequency of the pay-out can be monthly, yearly, quarterly and semi-annually.
Who should opt for Immediate Annuity Plans? Immediate annuity plans are perfect for those who want to receive regular income even after their retirement.
Are there any drawbacks? The primary negative factor about immediate annuity plans is that you cannot withdraw the investment amount or cancel the annuity plan.
The returns on an immediate annuity can vary. you can choose to get higher returns on the annuity plan for a specific number of years but thereafter, you will continue to get an annuity, at a lower rate.
This is a type of annuity plan that delays income payments until the investor chooses to receive them.
There are two important phases in a deferred annuity plan. These are the savings or accumulation phase and the income phase.
Accumulation phase: The policyholder pays the premium at regular intervals for a certain number of years in this accumulation phase.
Income phase: During the income phase, the policyholder is permitted to withdraw 1/3rd of the money accumulated. The remaining money is utilized to purchase an annuity product. This will offer regular income for the remainder of the policy holder’s lifetime.
There are two types of deferred annuity plans:
Traditional retirement plan
In a traditional retirement plan, the investment is mostly made in debt instruments such as government securities. These financial investments have relatively low-risk levels, making these plans an attractive option for risk-averse investors.
Unit-Linked pension plans
These plans are ideal for investors who want to plan their retirement early. With Unit Linked Pension Plans, an investor can choose their investment allocation from different asset categories like debt and equities among others.
Tax benefits of pension plans
Depending on the type of pension plan you choose, you can get various tax benefits. This section was introduced in the Income Tax Act in an attempt to encourage investments in pension plans. An investor can claim tax deductions up to Rs. 1,50,000 per year under Section 80CCC of the Income Tax Act.
Tax benefits on withdrawal
You can withdraw up to 1/3rd of the accumulated pension without having to pay any taxes.
Remember, it pays to start your retirement planning early.