Pension Schemes: Learn About Pension Plans, Types & More

If you aren’t a government employee, chances are that you won’t get any pension after retirement. So what do you do after you retire? You have two options. One is to do retirement planning and make the right investments so that you have enough in your post-retirement years. Another is a pension plan, where you put in certain amounts through your working life and get regular pensions after retirement. 

You can opt for government-run pension plans like National Pension System (NPS) or Atal Pension Yojana (APY). While NPS is for all Indian citizens, APY is meant for those in the unorganised sector, and not for those who pay income tax. Government-run plans offer some tax benefit. Insurance companies like LIC, HDFC Life, ICICI Prudential, Reliance, Bajaj Allianz etc. too offer pension plans.

Types of pension plans

• Immediate annuity: In this kind of pension plan, you pay a lump sum on which you get regular pensions.
• Deferred annuity: Here, you keep paying amounts for a certain period of time, called the accumulation period. So if you have a 25-year plan, you will start getting pension/ annuity after the end of that period.
• Insurance-based pension plans: These are plans that combine life insurance and investment. Part of the premium that you pay is invested in certain instruments, while the rest is used for providing life insurance cover.
• Work-based pension plans: These are plans in which employers and employees contribute. An example of this is the NPS, for government and private sector employees.

• The biggest benefit of a pension plan is that you don’t have to do the planning on your own. Many people find it difficult to estimate how much they need to save and invest so that they have sufficient income in their post-retirement years. A pension plan could be right for them.
• Some pension plans offer tax benefits. For example, if you invest in NPS, you can get a deduction as high as Rs. 2 lakh from your taxable income under Section 80C and 80CCD of the Income Tax Act.
• Another advantage of a pension plan is that you have to make regular contributions to it. This brings some discipline in your investing, and over the years, through the power of compounding, you’ll have a sufficient corpus to ensure a decent income after you retire.

• One of the biggest disadvantages of a pension plan is the lack of liquidity. Since your money is locked away, and you get a pension only after you retire, it could be a problem if you need funds urgently for an emergency.
• Returns can be quite low since conventional pension funds invest in instruments that are low-risk, like government bonds. Returns on these bonds are around 7-8 per cent, compared to equity, which can offer around 10-20 per cent. Of course, equity involves far more risk.
• The pension that you get is considered income and taxed accordingly. If you invest in mutual funds, on the other hand, you need to pay long-term or short-term capital gains tax only when you sell them, which you can do whenever you need cash, and your tax burden could be lower. Assuming that your investments are mostly long term in your post-retirement years, the tax would be 10 percent for equity funds (held over a year) for gains that exceed Rs. 1 lakh a year, and 20 per cent for debt funds held for over three years, with benefit of indexation (adjusted for inflation).