What Are Pension Plans And What Are Their Advantages?
Updated On Jun 15, 2022
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Do you also think about your days after retirement? Do you want to ensure a stress-free life after retirement? Then you should definitely invest in pension plans. These plans provide you with financial stability even after you have retired. But you need to know all about the pension plans and their types before you settle on one so that you don't miss any possible benefits.
What is a Pension Plan?
A pension plan is an added benefit that the employee of an institution gets. In this, the employee consistently contributes to a pool of set aside money in order to get funded after retirement. Every organization has this scheme for their employee's future benefits.
The contribution to the pension plan is made by the employer and the employee both. The employer gives a certain percentage of the employee's contribution to funding this pool of money. And the contribution from the employee is made in the form of a deduction from wages. This ensures a peaceful and stress-free retirement for you, as you will be receiving constant payments even after you have stopped working.
Types of Pension Plan
Pension plans give you dual benefits. By investing in pension plans, you get a way to invest your savings along with the coverage of insurance. So, it's very necessary that you know about all the different types of pension plans before you choose one for yourself. The different types of pension plans are explained below:
1. National Pension Scheme
This is a pension scheme offered by the government of India for all employees. In this scheme, you have to invest until you are 60 years old. After that, you will start receiving regular monthly income.
The money you invest in this scheme will either get invested in an equity fund or a debt fund. You can choose which fund you want to invest in, as the payments after your retirement will depend on the performance of your chosen fund. If the fund has grown substantially, you will get larger amounts of monthly payments.
In the NPS scheme, you can only withdraw 60% of your savings and the rest 40% you will have to use to buy an annuity plan.
2. Employee Provident Fund
This is a government-backed up pension plan in which the employee and the employer both contribute to the pension fund of the employee. And when the employee has retired, he will get the whole money contributed by him and the employer with interest.
There is a limitation to this scheme. If the employee has a monthly wage of more than Rs.15000, he/she is considered ineligible for this plan. And also, if you want to claim your EPF amount, you have to retire at the age of 55. You can get 90% of your pension fund when you retire, but if, for some reason, you leave the job, you can still claim 75% of your pension fund.
3. Public Provident Fund
A public provident fund is a pension scheme in which you can invest for as long as 15 years. The compounding for this long-term investment is extensive, and you will get a good amount in return in the end. In this pension scheme, you have a limit of 1.5 lakh rupees every year. It is the maximum amount that you can add to your fund each year. The government decides the interest in your fund.
4. Annuity Plan
It is the pension plan in which you get a steady income after your working days are over. It can be immediate or deferred. In the immediate annuity plans, you can start getting regular payments as soon as you have invested a lump sum amount. While in the deferred annuity plans, you will get the regular payments after a specified amount of time. In a deferred annuity, you can either make the payment at once or in a series of payments.
Advantages of Pension Plans
The various advantages that the pension plans give are:
- Pension plans ensure that you get a steady income or a lump sum amount after your retirement so you can live your life peacefully.
- Your pension fund is not owned by the employer, so even if the organization goes bankrupt, your pension amount will not get seized.
- The pension amount gets passed to your spouse or children in case you die before collecting your fund.
- In some of the pension plans, tax is exempted. You will not have to pay any tax for your saved money.
- Some pension plans give you protection from inflation.
Endnotes
Pension plans are schemes that help people secure their life after retirement. By getting into these schemes, you can assure a guaranteed income after you have retired. There are different types of pension plans available for everyone, so make sure to know about all of them before you choose one for yourself.
Also Read: What steps can I take to ensure stress-free retirement?
