One might have a decent job during young and mid age. They can shift jobs and increase their salary or business income. However, life might not be in similar lines post retirement. In the absence of regular source of income, one need to rely totally on savings and investments. Understanding various pension funds can help to choose the right one. In this article we would provide Different Types of Pension Funds in India, features and benefits.
What is Pension Fund?
Pension funds or pension plans are financial instruments which would help to do regular savings for your post retirement life. One can invest small amounts and build a good corpus in a phase by phase manner in the long term. One can attribute this in two stages
A) Investment or accumulate stage: Under this stage, one can invest small amounts in disciplined way either every month or every year and create a good retirement corpus till retirement.
B) Vesting Stage: Under this stage, whatever amount is accumulated would be received through the steady flow throughout the post retirement life.
There are various benefits in buying a pension plans in India. However, one should understand different types of pension plans so that they can take appropriate plan suitable them.
5 Different Types of Pension Funds in India
Let us discuss on various types of pension funds in India and their features and benefits.
#1 – National Pension Scheme (NPS)
National Pension Scheme (NPS) is introduced by Govt of India to create disciplined savings before retirement and have regular income post retirement. Here are the feature and benefits of NPS.
One can invest as low as Rs 1,000 per year in NPS.
There is no upper limit in NPS. Means one can invest any amount they want.
Under NPS, there are two accounts that can be opened. Tier-1 NPS is where it provides tax savings u/s 80C. Tier-2 NPS is only for investment and no tax benefits available. While the Tier-1 account is must, there is no requirement to open Tier-2 unless required.
One can invest in NPS till 65 years of age and can extend till 75 years.
NPS subscribers can choose various asset classes like equity, corporate bonds, government bonds etc. and appropriate allocation against each of them.
On retirement of 60 years, one can withdraw 60% of the accumulated amount and for balance 40% one need to buy annuity scheme. Such annuity can provide a regular flow of income.
#2 – Employee Provident Fund (EPF)
EPF is a government savings scheme provided for salaried employees.
Employer and employees need to contribute to EPF every month at pre-defined percentage.
Employee’s share would be deducted from their monthly salary.
Govt of India would announce interest rate every year.
On retirement, one would receive EPF accumulated corpus along with EPF interest which can be used for post-retirement life.
#3 – Public Provident Fund (PPF)
This is another good investment option for retirement planning.
PPF needs to be opened for 15 years tenure. One can extend it for a block of 5 years for any number of times.
One can invest as low as Rs 500 in a financial year.
Investments in PPF up to Rs 1.5 lacs would quality for income tax benefits u/s 80C of income tax act.
Govt of India would decide on the interest rate ever quarter.
Since this provides fixed and safe income, this has become a popular investment option for retirement planning.
#4 – Deferred Annuity Plan
One can buy a deferred annuity plan from any of the insurance companies by paying a single premium or pay regular premiums over a fixed term of say 10 years or 20 years or 30 years. After the policy period, pension income would be paid by the insurance company to the annuitant. These are like guaranteed pension plans even though the pension income would be paid after specific period.
#5 – Immediate annuity plan
Deferred annuity plan provides pension income after a specific period. However, under the immediate annuity plan, pension income would start immediately from next month. One need to buy immediate annuity plan by paying lump sum / single premium. Depending on the pension plan and their features, immediate fixed pension income would be paid every month. There are immediate annuity plans where one can get back their lump sum investment after a specific period beyond monthly income. One can also opt for joint life annuity plans by including spouse.
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