Spend, Save and Invest Smartly
In a pension plan you invest sums of money and build a corpus which is used to build your retirement fund. On retirement you are paid a pension from this fund.
Your money is invested in fixed income securities such as fixed deposits or debt mutual funds. The returns are much lower than market linked investments such as unit linked pension plans. The accumulation phase is one in which you invest in the pension fund in your working years The distribution phase is one in which you get a pension after your retirement from the corpus which you have invested in your working years.
You invest a fixed sum of money each month in a unit linked pension plan in your working years. This amount is then invested in equities and units are assigned to you.
If the stock market gives good returns you get a high return on your investment and if the stock market falls your returns are less. Your investments are locked in for a period of 5 years and you cannot surrender the ULPP.
Charges are similar to a unit linked insurance plan.
ULPP’s offer a compulsory life or a health cover.
A minimum guaranteed return of 4.5% is assured in a ULPP.
After the vesting age mainly the age you retire you get a pension at a regular time period such as monthly or yearly. About a third of the corpus is given to you on retirement and the rest is commuted (invested compulsorily in an annuity).
In an annuity a type of pension plan you invest (Create a corpus) and then on your retirement you get a pension. In an immediate annuity plan you pay upfront a lump sum and from these amounts you get a pension paid to you a month or a year later. In a deferred annuity plan you have to collect or make the corpus for your retirement. You then purchase an annuity from this amount.
You get annuity payments as long as you are alive on a regular basis such as a monthly or a quarterly basis. No annuity is paid to your dependents.
You get annuity payments as long as you are alive on a regular basis such as a monthly or a quarterly basis and on your death your dependents get the sum assured as well as accrued bonuses and guaranteed payments.
You can opt for an annuity plan where payments are made for a defined period such as 5, 10 or 20 years.
If you a high risk patient of a cardiac ailment then you can opt for this policy and you are paid an annuity for this period. If you die before this period then your dependents get these amounts for the specified time period.
These annuity policies have a 50% and a 100% payout for your spouse. If you die your spouse gets 50% or 100% of the annuity payments for as long as she lives depending on the annuity policy you have opted.
You get tax benefits under Section 80 C and Section 80 CCC of the income tax act combined up to INR 1.5 Lakhs as a deduction on the amounts you contribute towards the pension plan.
On the vesting age you get a third of the Corpus and this is tax free. The remaining amounts are added to your taxable salary and you are taxed as per the income tax slab you fall under.
Choose your pension plan wisely. Beware of the lock in period of your pension plan. You cannot withdraw from a pension plan and this is a long term commitment.