The basic purpose of pension planning is to create a steady and stable source of income for the individual after his or her retirement. The combination of increasing life expectancy and inflation makes pensions an integral part of a smart financial planning.
How Does Pension Planning Work?
Pension planning involves creation of a corpus through regular and periodic payments into a pension plan. The contribution amount depends on the age of the individual and the post-retirement financial needs of the individual. At the time of retirement, a part of the corpus can be withdrawn in lump sum, and the rest can be invested in annuities for a steady and stable income as long as the individual is alive.
Meaning of Technical Phrases
There are certain technical phrases used with reference to pension schemes and funds that can seem a bit confusing.
Accumulation phase is the period over which the individual makes regular contributions to the corpus. If you are 32 years old and plan to retire at 60, then your accumulation phase will be for a period of 28 years.
Annuitization phase begins after the corpus is invested in an annuity that provides a steady and stable income on a regular basis. In the above example, the annuitization phase begins upon the retirement of individual at the age of 60 years.
Vesting date is the exact date at which the corpus is vested in the hands of the policyholder. The individual will have to exercise the option of commuting the corpus and go in for an immediate annuity plan on the vesting date.
Commuting refers to the withdrawal of a lump sum amount from the corpus created over the years. Normally, the policyholder is allowed to withdraw a third of the corpus amount in lump sum for immediate use after retirement.
An immediate annuity plan involves a one-time payment that will provide steady monthly income in the future. A deferred annuity plan, conversely, involves monthly or periodic contributions that will provide a lump sum return in the future. Pension planning involves creation of corpus through deferred annuities and creation of a steady post-retirement income through immediate annuities.
Types of Pension Plans
· Lifetime annuity plans provide a fixed monthly income till the death of the policy holder. Upon demise, the nominee receives the premium amount paid or the balance of the corpus amount, whichever is higher.
· Guaranteed annuity provides a fixed income on a monthly basis for a fixed period of time. In case of death within this time period, the monthly income will be transferred to your nominee. If you survive the period, then you will receive the monthly income for your lifetime.
· Joint annuity allows you to secure the financial future of your loved one even after your death. The annuity will provide regular income until your death, after which the payment should be made to your nominees. You can have multiple nominees to ensure even the last survivor does not face financial problems.
· Certain annuity plans provide a fixed income for a specified period of time. Payments will come to an end after this period, but your nominee is assured of stable income in the event of your death during the specified time period.
Overview of National Pension Scheme
There was a time when PF was the only viable retirement planning option in India. Today, there are differentpension plans in India, including PF, private pension policies, and the National Pension Scheme. The National Pension Scheme allows allocation of funds to different asset classes including equities and debt funds. While relatively riskier than PF, this option allows you to generate higher returns on your retirement corpus.
Conclusion
You cannot finalize the best pension planfor your retirement life unless you understand the basics of pension planning. Make sure you invest money in multiple retirement plans to increase your chances of enjoying a secure and financially-stable life after your retirement.
Read more about pension plans on HDFC Life.
About HDFC Life
HDFC Life, one of India’s leading private life insurance companies promoted by HDFC Ltd. & Standard Life Ltd., offers a range of individual and group insurance solutions.
