Pension plans are important for building a financial corpus for post-retirement life. These plans can provide a regular income after retirement. While you might think it is easy to understand pension plans, there are a few things that you might not know.
In this article, we will discuss a few surprising things about pension plans.
Retirement plans are crucial for securing your life after retirement. The pension can replace your regular income to help you meet various expenses. Generally, there are two phases in a pension plan-
- Accumulation Phase
During this phase, you need to pay premiums until you retire.
- Vesting Phase
The vesting phase starts when you retire. After that, you will start receiving annuities.
A lot of people purchase plans for retirement. However, not many know everything about pension plans. Here are some things that you might not know about pension plans-
- A pension plan is purchased to get income for life after retirement. The corpus gets accumulated from the time the policy is purchased until the policyholder’s retirement. However, after retirement, the policyholder can get a pre-fixed percentage of the accumulated corpus. The rest of the amount is invested in an annuity option. Thus, pension plans don’t provide policyholders with the diversity of choice.
- A pension plan is taxed in a different way compared to a regular ULIP. Once the policyholder retires, the fixed percentage of the corpus that can be withdrawn is tax exempt. But the rest of the corpus that is used for annuity payouts are taxed. Thus, a pension plan doesn’t offer a lot of tax benefits.
- Pension plans rely on annuity investment. Their objective is to provide income after retirement. Hence, the fund options in pension plans are fixed.
- While a pension plan offers limited flexibility, it can be beneficial as it provides a great method for building annuity benefits. Also, pension plans offer fixed benefits as they aren’t affected by market fluctuations.
- Due to lack of fund options and limited flexibility, pension plans are fixed. The major part of the corpus is accumulated solely for retirement cover.
Factors that you Should Keep in Mind While Purchasing a Pension Plan
- Emergency Fund
An unforeseen situation such as a medical emergency might require you to spend a lot of money. A pension plan can help you accumulate funds in case a medical emergency arises in the future. You should keep in mind the future medical expenses while selecting a pension plan.
- Monthly Expenses
When you retire, your regular income will stop. The income you receive from your pension plan will help you pay for your monthly expenses. Therefore, you should look for a pension plan that provides sufficient cover.
- Interest Rate
There are many pension plans. The interest can vary from one plan to another. Before purchasing a plan, you need to compare various policies. Buy a policy that can provide you with higher returns.
Retirement planning can help you live a stress-free life. Thus, while purchasing a policy, consider these points.