In every individual’s life, there are three stages - childhood, youth and the old age. The most worrisome stage for him is old age. His biggest concern about old age is arranging for funds to meet his needs in this critical stage when he would not be in a position to earn.

The main objective for a retired/semi-retired individual is to have financial independence and have enough financial security for his non-earning years ahead. In order to achieve this independence, he must sow the seeds during his earning years. A lot of people are aware of this acute need and start saving in many forms bank deposits, investments in stocks and bonds and gold, to name a few.

However, in the course of his life, the investor tends to utilise his savings to meet some very legitimate needs like children's education, daughters marriage or paying for an expensive medical treatment. The money saved to finance retirement never really gets accumulated and is instead used to finance a lot of other needs. This leaves the investors with little or nothing for his retirement. With the mortality rate decreasing, and lifespans increasing, providing for retirement has become a very important issue that needs to be addressed with some urgency.

A simple solution for this is investing in a pension plan. According to this plan, you get into a contract with an insurance company, whereby you invest a specific amount every year with the company in the form of premiums and in turn the company promises to provide you an amount every year after your retirement age.

By investing in a pension plan, you are specifically saving for your retirement, ensuring regular income after you stop working. This investment lacks liquidity, not permitting the investor to easily withdraw the amount invested. If you want to discontinue the plan then you will get a surrender value, which isn't much, approximately 50% of the premiums paid. This itself makes the option very unattractive to the investor, thereby ensuring enough money is saved for old age and not utilised for any other purpose.

Pension Plans are available in two forms – immediate annuity and deferred annuity. The main difference between the two plans lies in the commencement of the payment of annuity

Immediate Annuity: Here a lumpsum is given to the insurance company in form of a single premium, which is known as the purchase price of annuity. The payment of annuity or pension starts immediately.

Deferred Annuity: Here, the premiums towards the plan is paid over a period of time, accumulating the purchase price of the annuity. After the completion of the premium payment tenure (deferment period) the amount then collected is used to purchase an immediate annuity plan, after which the payment of pension starts.

In this the payment towards the premium during the deferment period can be done either quarterly, half yearly, annually or in a single premium. The premiums paid upto an amount of Rs 10,000 is exempt from gross income under section 80CCC.

In certain deferred annuity plans, the insurance company allows the policyholder to withdraw a specific amount from the accumulated purchase price. This amount is tax free under the income tax laws. However the pensions paid to the policyholder are taxed as income earned. Read more on deferred annuity plans.

Thinking of pension is not an act of tomorrow but a need of today. It is an important part of financial planning.

To know more about how insurance can be used as a financial planning tool and how it can be designed to take care of most of the eventualities of life, please register here.

Add Comments