This comes in quite handy to ensure financial independence
Pension funds are powered by various types of pension plans
A pension fund (alternatively known as a superannuation fund) refers to any fund, scheme or plan that gives you retirement income. While many Government jobs provide post-retirement pension benefits, those jobs account only for about 3.5% of all jobs in the entire nation. The majority of other jobs, especially in the private sector, do not provide regular pension or any pension at all.
When someone’s steady monthly income reduces after retirement, there is still a life to live; expenses to bear and market costs in this ever-increasing inflation scenario don’t magically come down. Here’s where pension funds come into play, which is one’s own post-retirement financial security plan.
What exactly are Pension Funds?
Pension funds or ‘retirement funds’ are those funds wherein salaried people can invest some portion of their monthly incomes during their service period to make up a consolidated sum of money, which will provide monthly sums as pension after they retire from active service.
This comes in quite handy to ensure financial independence, even if one has a fat bank balance. This is because bank balances can disappear in a whisker in times of emergencies or other unplanned and uncalled needs. When everything else fails, pension funds can support the retired individual.
Pension funds differ in shape and size from country to country. Talking of the Indian scenario, pension funds come in two stages – the accumulation (giving) stage and the vesting (taking) stage. The accumulation stage is where you contribute regular funds to build up the pension fund, and the vesting stage is where you are given monthly pensions from the built-up sum.
Types of Pension Plans in India
Pension funds are powered by various types of pension plans or schemes, with each plan having something unique. These funds can be accumulated by contributing to it regularly (mostly monthly). The contribution differentiates the pension plans into various types.
The major three types of pension plans in India are as follows:
Insurance Company Sponsored Plans – These are the funds wherein an insurance company sponsors the funds and invests them in debt funds only. As we know, debt funds have a low-risk factor and thus lower returns; these are suitable for non-adventurous investors who don’t want to deal with many risks.
Unit Linked Plans – Here, money is invested in both debt and equity funds, often equally. This creates a healthy balance between returns and risk, as equity funds generate more returns and carry more risk than debt funds. This is considered one of the most popular plans around.
Government-Sponsored Plans (NPS) – This is the ‘Sarkari’ plan, of which the National Pension Scheme (NPS) is the flagship. The funds invested wholly in government securities like bonds or entirely in other types of debt securities or a mix of both debt securities and equities (with a 75% cap on equities) based on the subscribers’ preference. Risk-averse and conservative investors and others, who admire the government tag, readily opt for this plan.
Pros of Pension Funds
Pension funds carry several benefits which are discussed below:
- Works as Old-Age Security
Many people are not physically capable of doing work after the retirement age, typically 60. Pension funds act as a valuable source of sustenance during that period.
- Provides Investment Options
It’s not mandatory to invest in only debt or only equity; risk-tolerant investors can go for a mix and match of the both to ensure more returns than the security-oriented debt-only options.
- Provides Life Insurance Cover
Often, pension plans also allow the lump sum accumulated to be withdrawn at the time of retirement or death, whichever happens earlier. Thus, they offer some sort of life insurance cover as well.
- Provides Emergency Withdrawal Options
An investor can withdraw a lump sum during any emergency, such as a major health issue or accident.
Cons of Pension Funds
Pension funds also carry certain disadvantages as well, which are as follows:
- Have to Begin Early
The pension plans are designed in a way that the early beginners will get better returns. However, it is not always possible because of financial or other issues.
- Higher Return Options carry a Higher Risk
If one wants to go for high returns, he or she will definitely have to invest in equity-heavy options, which entail a certain risk.
The annuity received is not totally tax-free.
- Pension Funds and Tax
Section 80CCC of the Income Tax Act, 1961, entitles individual investors to tax deductions up to a maximum of Rs. 1.5 lacs annually on costs incurred in either buying a new plan or renewing a previously subscribed plan of similar nature although the pension received including interest or bonus accrued on the premium is taxable during the year in which it is received.
Similarly, any withdrawals are not fully tax-free. One-third or 33.33% of the sum liable to be handed over to the retiring person by the pension plan is tax-free; the rest of the fund is taxable as per the income tax rate applicable to the concerned individual at the time of retirement.
Talk to your advisor to know more and enjoy a financially sound life even after retirement!
That’s why Comparte Investment team asks do you have “Nivesh Ki Aadat”.
(About Author: Arindom is a professional writer, editor, blogger and a member of the International Association of Professional Writers and Editors, New York. A management postgraduate in finance with extensive industry exposure, he is associated with many reputed global online magazines and publications as a regular contributor. He loves to help his readers writing highly informative and well-researched investment-related content to make informed decisions.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of organization)