Mahesh Pai highlights the necessity of a proper retirement plan and the different pension schemes available
In today’s challenging and competitive environment of business, people forget to make a proper provision for their retired life. A business owner is always running after money but forgets the main motive of getting into business which provides a quality life for him and his family. They are constantly investing and reinvesting only into their business, which is the main reason behind not planning for a pension. As per a report 88% people in India go through a bad phase when they are supposed to be enjoying their retired life. We need to understand the different types of pension and why individual pension is the most important.
There are mainly 3 types of pension:
1. Social Pension
Social pension is always given by the government or the state when the citizen of that state retires. This facility is available only for senior citizens and is provided to them until they die. It is impossible for the government to provide pension to every senior citizen. Another reason is the Fiscal Deficit of the country due to which the country cannot afford to pay pension to all senior citizens.
2. Occupational Pension
Occupational pension is when the employer provides pension to employees for services rendered to the company. In India none of the private companies give occupational pension in fact even the government companies have stopped with occupational pension since 2004. However there are companies which provide their employees with gratuity after calculating all the years the employee worked for that one company respectively. The gratuity is usually paid as a lumpsum.
3. Individual Pension
This is the most important type of pension. Individual pension is when you plan for your own pension. When you don’t get a social pension or an occupational pension you have to make it a priority and take charge to plan your individual pension plan. Under individual plan you can start getting your pension as and when you want, you don’t have to necessarily wait until you reach the age of 60. You can also retire early with the help of an individual pension but one cannot retire early before making a provision for an alternate source of monthly income.
Importance of Individual Pension
Since life expectancy in India has increased, retirement planning has become mandatory all the The reason of life expectancy increasing could be advanced medicines available, better medical treatment, self-awareness (taking care of your own body in terms of diet and fitness) and a good health cover which allows you to get the best doctors and avail the best treatment.
Longer life expectancy in future will need more money for retirement compared to today.
Another major reason why we need to plan for retirement is because of the Lack of social security system. There is
a. No free medical services for senior citizens.
b. Senior citizen health care is costly.
c. Free pension is not available by the government.
Your income is going to stop one day but your expenses will continue. Retirement planning is no more an option but has become a necessity and you cannot consider your children to be your retirement plan. With inflation and increased standard of living the expenses for your children will be very high as compared to today. A guaranteed monthly pension will let you and your family live a stress free life tomorrow and for the days to come.
Guidelines Before Investing
Before investing into an individual pension fund you need to check whether the pension is taxable or tax free and also check if the pension rate is guaranteed or variable. This will determine the standard of living while you retire.
There are mainly two common types for individual pension in India.
1. A combination of Accumulation and allocation.
People accumulate money till the age of 60 and then invest it into a pension fund. Under this you keep accumulating a certain sum on money on regular intervals and then use all the accumulated corpus in a pension fund as and when you want. It is the process of building the corpus for the purpose of retirement. E.g. SIP or PPF
Drawback: In the process of accumulation there arrives occasions where you need to withdraw your funds, it could be for your child’s education or marriage or business expansion or even funds needed for a startup of your child.
2. Deferred Pension Plan
You keep saving a certain amount of money and earn interest on it but only at the age of 60 you will receive the pension. Example NPS has become very popular financial instrument, Atal pension Yojana for the people of age below 40 with a maximum of 5000 pension.
Drawback: Under NPS, pension rate is not guaranteed and the pension is taxable. Whereas Atal Pension Yojana cannot give more than 5000 pension
It is never too early or late to start investing in retirement plans. However sooner, the better; whether you are salaried or entrepreneurial, there are a variety of individual pension plans:
1. Deferred Annuity: Here a lump sum or a systematic payment can be paid over a period of time. Pension begins after completing the term, No taxation (unless you withdraw the corpus)
2. Immediate Annuity: Only lump sum investment allowed in this plan and Pension begins immediately after investment.The nominee can claim the pension or the entire corpus after the death of the investor
3. Annuity Certain: The pension is disbursed for a specific period. The investor can choose a period (say, age 65-70) and the nominee can claim the pension after the demise of the investor.
4. With Cover Pension Plan: Comes with a ‘cover’ -investor’s dependents are entitled to a lump sum after he/she expires. The investment amount is not large as most of the amount goes towards building the corpus
5. Life Annuity: Here the pension is paid until the death of the investor. However there is a ‘with spouse’ option where the spouse continues to receive the pension after the investor passes away.
6. National Pension Scheme (NPS): This Plan has been launched and managed by the Central Government.
7. Guaranteed Period Annuity Plan: The investor will receive the pension only for a specific term like 5 to 20 years.
If you are a person who is looking for a safe and secured pension with over and above the prevailing interest rate then today is the time to begin. Don’t be a burden in your old age to your children but be their strongest support.
The writer is an investment consultant and business coach. Email: mahesh@maheshpai.in
