What are Pension Plans?
As the name suggests the intent of the plan is to provide regular income post retirement as most of us work in private organization hence, not supported financially after retirement. A proper planning of pension amount is required to ensure that lifestyle doesn't fall too much after one stops working.
How does pension plan works?
Easier way to understand is that one can save systematically during his earning period (accumulation phase) to build a corpus till he/she reaches retirement roughly around the age of 60. This systematic saving is invested by experts in instruments duly approved by regulatory bodies like IRDA so that better returns are generated till retirement age is reached. Now annuity period begins when the retirement age (here also known as vesting age decided by applicant) is reached, applicant has an option to take out (commutation) a maximum of 33% Tax Free and leave the remaining to be converted into equated monthly payouts, similar to pension. It is not difficult to understand that the bigger the premium paid today, the bigger will be the corpus created at retirement and bigger will be the pension amount.
Types of Pension Plans
- Deferred Annuity Plans : It is the standard annuity plan where accumulation phase is used for creating corpus before starting monthly pension at vesting date.
- Immediate Annuity Plans: There is no accumulation phase. Person has to make lump sum investment to start annuity from immediate effect. This generally is suitable for retired people who have received big chunk of money from their organizations or sale of property and don't have provision of regular pay henceforth.