7 things you need to know about pension plans
7 things you need to know about pension plans: As our standard of living continues to improve with rising inflation, retirement days can be a little challenging for all of us. Therefore, to remain financially stable in the absence of your job, you must have a source of income other than your savings.
Pension plans are an effective source of income that can provide you with wealth in the future. Therefore, you should have a pension plan to meet any unexpected expenses related to home, health and children and prevent financial burden.
Here are some essential factors you must know about pension plans.
You should start saving early
Pension schemes are designed to provide financial autonomy and retirement pension to people. So, if you start investing at a young age, there will be no burden of investing big amount later. That is why you should start saving as early as possible.
The accumulation period is the period during which you have to pay the premium amount. Money will accumulate over time as you build a large corpus.
Mandatory purchase of annuity
An annuity is a contract between you and the insurance company. You need to pay a lump sum to get regular distribution in return. While buying a pension plan, you should buy an annuity plan for 2/3 of the accumulated corpus.
Pension plans are not flexible
Pension plans are pre-existing long-term contracts that are irreversible. This means that you cannot withdraw the amount even in case of financial crisis. This is one of the significant drawbacks of the pension scheme.
So, if you are not going to continue investing, you should not opt for a pension plan.
What are the figures in the pension plan?
Some of the important figures included in the pension scheme are mentioned below.
- Promoter: A person who promotes the formation of a pension scheme
- Participant: The natural person in whose interest you create a pension plan
- Beneficiary: The person receiving the pension in the absence of the participant
- Insurance Company: A commercial organization responsible for managing a pension fund
- Depository Company: A financial institution that takes care of integrated custody of pension funds and other assets.
A regular pension plan does not provide tax benefits
When you pay premiums into a pension plan, you get a tax deduction. Therefore, when the pension is paid within the annuity period, it becomes taxable based on the tax rate slab of very senior citizens.
Since you don’t have more than one pension plan, the portfolio will be more concentrated, and less diversified.
Pension plans are essential to meet your future financial needs. Thus, you should be fully aware of every aspect of pension planning as you will be investing for your retirement, and it should be beneficial to you.
Apart from this, you should also be familiar with the above points to get a complete idea about pension schemes.