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What is a Pension Plan?

Updated On Nov 24, 2023

Public Provident Fund (PPF) is one of the most popular retirement planning schemes for an individual to adopt in India. When an individual begins saving for retirement early, the funds accumulate over time to provide financially comfortable golden years to the respective individual. A well-chosen retirement plan can help an individual outperform inflation because of the power of compounding. To find out more about pension plans, read on.

What are Pension Plans?

Pension or retirement plans provide both investment and insurance protection to an individual and their respective family. By contributing a certain amount to their respective pension plan on a monthly basis, an individual will gradually acquire a substantial sum. This will ensure that an individual has a constant stream of income once they retire.

Why Pension Plans?

To have a financially secure retirement, every individual should invest in the pension scheme. Several retirement programmes are covered under Section 80C of the Income Tax Act of 1961, and taxpayers are entitled to tax rebates of up to Rs.1.5 lakh. Any strategy an individual uses must be in line with their investing objectives (or retirement plans).

For example, if an individual wants to retire early, then their respective funds should be sufficient to sustain them during their retirement years. Therefore, the key is to take time and appropriately pick the right retirement plan that works for the respective individual.

Benefits Of Pension Plans

Following are some most important benefits of pension plans:

Guaranteed Income

Depending on how an individual invests, they can obtain a regular and stable income after retiring (delayed plan) or immediately after investing (immediate plan). This assures that when an individual retires, they will be financially self-sustained. They may use a retirement calculator to get an approximate idea of how much money they will need once they retire.

Tax Rebates

Section 80C exempts some pension plans from paying taxes. If an individual wants to invest in a pension plan, Chapter VI-A of the Income Tax Act of 1961 provides considerable tax relief to individuals. Sections 80C, 80CCC, and 80CCD go into great depth about them. For example, tax deductions are available under Section 80CCD for the Atal Pension Yojana (APY) and the National Pension Scheme (NPS).

Liquidity

Retirement plans are mostly a result of a lack of money. On the other hand, some plans enable withdrawals even while the account is being built up. This will guarantee that the money an individual is acquiring is available to them in the event of an emergency, rather than having to rely on bank loans or other sources of funding.

Vesting Age

This is the age at which an individual will start receiving their monthly pension. For example, most pension plans have a minimum vesting age of 45 or 50 years. It is flexible until they reach the age of 70, while some firms enable an individual to vest up to the age of 90.

Time Period

An individual has the option of paying the premium in monthly instalments or all at once as a lump sum investment. Over time, the wealth will increase in tandem, resulting in a significant fund for the respective individual. For example, if an individual begins investing at the age of 30 and continues until they reach the age of 60, they will have invested for 30 years. This fund is where the majority of an individual's pension for the specified term comes from.

Endnotes

Annual financial planning is really interesting as it allows an individual to examine and adjust their goals as their lives advance, as well as track their progress toward those goals. Individuals will eventually realise that the small things they do on a daily and monthly basis, as well as the larger things they do each year and over decades, all contribute to their financial goals.

Also Read: 

Things To Consider Before Retirement Planning

What Is The Role Of Annuity In Retirement Planning?

Disclaimer: This article is issued in the general public interest and is 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. 

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