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10 Things You Need to Know About Pension Plans

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10 Things You Need to Know About Pension Plans
September 12, 2023

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As the cost of living continues to rise, it's becoming even more important for young individuals to start planning for their retirement as early as possible. Thankfully, there are a number of pension plans available in the market to make our golden years easier. However, before you decide on which plan you would like to invest in, here are some important things you should know about these plans:

1. There's an accumulation period

From the time you purchase your pension plan until the time you retire is known as the accumulation phase. During this accumulation period, the premiums that you pay your policy provider will be invested in certain avenues. You can get some tax deductions on your premiums under Sections 80C and 80CCC of the Income Tax Act.

2. You have to purchase an annuity plan

Upon retirement, you will be able to withdraw only 1/3rd of the accumulated money from your plan. The balance amount must be invested in an annuity plan. To understand how much monthly pension you’ll receive based on your chosen plan's interest rates; you can use an annuity calculator. This tool helps you estimate and plan your future income more accurately.

3. The plans don't offer any flexibility

Once you choose a particular plan, you have to stick with it for a few decades. Unfortunately, this makes it difficult for you to change your investment plan halfway through or liquidate your assets in an emergency.

4. Insurance providers offer pension plans

Ever since private companies have entered the insurance market, they have started offering Unit Linked Pension Plans or ULPPs. These plans offer investors the opportunity to gain more returns on their savings, as they get to choose where their money is invested, and whether they'd like a mix of equity and debt instruments in their portfolio. These plans offer individuals a lot more flexibility than traditional pension opportunities.

5. It builds discipline

One of the best features of these plans is that they promote savings and help people build financial discipline in their life. A non-payment of premiums could prove to be incredibly expensive, and people will always budget for their premiums and other necessary expenditures before planning the rest of their finances.

6. They are not tax exempt

While the premiums you pay towards your pension policy may have certain deductions, the actual pension that you receive on the maturity of the plan is taxable.

7. You can choose to invest instead

If you'd prefer to have your returns tax exempt, you can choose to invest some money in a Public Provident Fund (PPF), or equities and mutual funds instead. Of course, as with all kinds of investments, you would need to weigh out the pros and cons before signing on the dotted line.

8. Pension schemes aren't very diverse

Most pension plans have only a few limited avenues where investments can be made. Due to this, your portfolio is not properly balanced or diversified, and although you will eventually get the pension you require, you may be able to gain higher returns if you diversify your portfolio with different investment opportunities.

9. You could choose Mutual Funds

A few MF companies offer government-approved retirement schemes, offering individuals a chance to diversify their pension portfolio. These plans also allow you tax benefits under Section 80CCC of the Income Tax Act, which are otherwise not offered with regular mutual funds.

10. National Pension Schemes aren't always the best idea

Many individuals prefer choosing an NPS over other pension plans due to the flat charges and low fund management fee. However, these schemes offer very little flexibility as the retirement age is fixed at 60, and you can only withdraw 10% of the accumulated amount every year. These plans also have higher tax brackets.

Every type of pension plan has its advantages and benefits, but the need to secure your financial future cannot be overstated. To explore the best option for your needs, you can check out HDFC Life's retirement plans. For a detailed estimation of your retirement income, consider using an annuity calculator, which can help you make correct decisions based on your savings and retirement goals.

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ARN: ED/12/19/17049

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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