Understanding The Different Types Of Retirement Plans
Updated On Jan 03, 2022
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When you are in employment, part of your salary is deducted and deposited in the government scheme called EPS (Employees Pension Scheme) every month. The employer also contributes to the employee's EPS account as per government rules. Over the years, the corpus is accumulated as a large sum. After your retirement, you will get the pension amount every month through your EPS account.
With the rise in inflation and lifestyle related expenses, the pension amount received from EPS scheme is found miniscule for many people. It is not sufficient to meet your monthly expenses. Hence it is recommended that you can consider buying other types of retirement plans in addition to EPS pension.
Top Available Retirement Plans
The major types of personal plans are as below:
1. National Pension Scheme
The central government has created a dedicated body called PFRDA(Pension Fund Regulatory and Development Authority) to administer a country-wide pension scheme, called NPS(National Pension Scheme).
The scheme consists of two tiers. Tier-1 is the mandatory account, in which the subscriber has to deposit a minimum amount of Rs.6000 every year. There are withdrawal restrictions in this account. You cannot withdraw any amount from a Tier-1 NPS account till it matures to 10 years. After the same, you can withdraw 25% of your corpus, only for specific purposes. Over the years, the fund gets accumulated with compounding effect. When you attain 60 years of age, you can withdraw 40% of the accumulated fund. For the balance amount, you can buy the annuity to avail regular pension income. You can select a monthly, quertery, six-monthly or annual option to receive the regular pension.
On the other hand, the Tier-2 account offers much more flexibility to invest and withdraw your fund. You can freely invest your surplus money in this account and use the money as and when you need it.
2. Public Provident Fund
Although PPF (Public Provident Fund) is not declared as a pension plan, it serves all the purposes of the pension plan, if managed properly. Being a government backed scheme, it provides sovereign guarantee for your hard earned money.
You can invest yearly Rs.1,50,000 in your PPF account. The money keeps on growing with an attractive interest rate. You can withdraw the entire amount after 15 years of tenure and buy the annuity plan from any PFRDA recognised pension companies. Such an annuity plan will give you a monthly pension for life.
3. Pradhan Mantri Vay Vandna Yojna (PMVVY)
Popularly known as PMVVY, or Pradhan Mantri Vay Vanda Youjna is most suitable for senior citizens having lump sum corpus after retirement. You can invest upto Rs. 15 lacs in this scheme. The entry age for this scheme is 60 years.
The scheme is administered through LIC and backed by the government. Hence, it ensures a steady, guaranteed stream of pension once you invest a lump sum amount in this scheme.The assured rate of interest is 7.40% per annum for the financial year 2020-21. The interest rate is reset at the beginning of every financial year. Once invested, you can avail regular pension income under this scheme. You can choose the option to avail the pension on a monthly, quarterly, half-yearly or yearly basis.
4. Senior Citizen Saving Scheme (SCSS)
As the name suggests, any senior citizen of above 60 years can invest in this scheme upto Rs. 15 lacs and avail regular pension. The pension amount is credited directly into the bank account of the senior citizen at the end of each quarter.
Like PMVVY, this scheme is also backed by the central government. Major benefit in investing with SCSS is stability of interest rate. Once you lock-in your fund at a particular interest rate, it remains constant during the entire term of the scheme. The current interest offered in the scheme is 7.40% per annum. The scheme tenure is of five years and can be extended for further three years once it matures.
5. Deferred Annuity Retirement Plan
Under such a plan, you can begin receiving a pre-decided pension amount every month, once you attain the specific age. While you subscribe to such plans, you will have an option to select a debt plan (low risk product) or capital market plan(equities and bonds). The debt plan is suitable for conservative investors/ The capital market plan is expected to give high return, with higher exposure to the market risk.
The key feature of deferred annuity is the wealth accumulation through the power of compounding. Due to the waiting period, your corpus gets the time to grow. After the waiting period is over, you will get a higher pension amount, even if your original subscription was very small.
Not only is retirement planning an essential aspect of one's overall financial planning exercise but is also crucial to start early in life. One must always remember that systematic and early retirement planning can help you reduce your financial burden incurred during the retirement years and help you plan for a carefree and financially secured retirement life.
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.