Pension Plan Vs. Retirement Plan – India
Every person is different and every one has different perception about retirement:
- Some don’t want to talk about this
- Some just want to feel secured at Retirement
- Some think that they will not retire
- Some think that their kids are their pension plans
Many people think retirement as the end of their happiness and like industrial age, they will be gifted the holy book and an umbrella. If you summarise in a few words, everyone wants secured retirement with dignity. If you are going to buy a pension plan to feel secure, you must read this small write up.
The best way to handle a situation is to face the situation. Retirement is imminent but there are two choices. One your market dynamics make you retire and second – you determine the date and situation, when you want to retire. We at Planyourworld believe that retirement is the time when you live your passion after taking care of the expectations of loved ones. This is the time when you can work for the thing you would have loved to work for. There are many people who started on new journey and succeeded, they have set role model for us. It’s not necessary that you retire at 60; you can retire much before the traditional retirement age, provided you have sufficient resources to take care of your needs. If you plan your life, you can retire in next ten years of planned life, if you prepare the plan and stick to it.
Your Retirement Needs
The preparation for Golden years should start whenever you realize that you are going to retire some day. Or you will not have your job or your physical limitations will not allow you to work. Retirement means your monthly income should not be dependent on your profession at this age your money should work for you. Many of us think they will spend less after retirement. Just ask a question to yourself.
How much do you spend on daily basis on working days?
How much do you spend on holidays or vacations? Retirement is a long vacation, at least for a few years after your retirement or till the time you are physically fit. To realize your expenses after retirement you should check these questions:
- Where will you be settled after retirement?
- Which home would you like to keep for yourself?
- Where will your children be settled?
- Who will be your dependants?
- How many times a year, you will visit your kids’ home or they will visit?
- Would you like to gift your kids and grand kids, as you do it today?
- How would you manage the medical necessities?
- Would you like to be self dependent for medical facilities?
- What would you do in your working hours?
- Which passion do you want to fulfil?
- How much wealth do you want to leave for your dependants if they live after you?
- Are your kids requires any support from you?
- Would your expense grow year on year?
What are pension plans?
Very often we think by buying Pension plans, we shall have secured retirement. I am extremely sorry if you think in the same way. Pension plans are the investment plans provided by insurance companies and designated pension providers. There are different plans and they have different options for people. The main question is, are they really dependable? First you should know-
How pension plans work?
Generally in these plans, you invest for ten, twenty or more years to accumulate funds and then company provides you a fixed amount of pension depending upon the option you chose. These plans are of long term in nature, and these give you a good corpus because of the withdrawal limitations. There are mainly two types of Plans, based on investment nature.
Endowment Pension Plans
In these kinds of pension plans you pay the premiums to insurance company, for the term you chose and it invests your money in the manner defined by the Government. In these plans you get the bonus on your sum assured in accumulation phase. At the end of term the sum assured and the entire entire accumulated bonus is taken as purchase price and it is kept for distribution as pension. You can choose your pension option. You can take one third of the total corpus in lump sum at the end of the term. In these plans the irony is bonus and the return as pension. In real terms you get lesser than the total money you actually invest. Generally the bonus offered in these plans is lesser than inflation or the actual growth rate of your annual expenses.
U.L.I.P for Retirement
These plans are better than the endowment plans. In these, the investment is done in stock market, debt market and money market, based on the fund you choose. Expense ratio in these plans is the main cause of concern because the expense ratios are on the higher side. Normally the expense ratios are not disclosed or published. More over if you surrender the plan before the investing age the entire amount is taxable in your hands and it will be clubbed in your income in that year. If you get Rs.50 lac, from the surrender of pension plan, you will have to pay Rs. 15 lac, as Income Tax.
When you take pension from the pension plans, you get returns lesser than fixed deposits. Pension plans always give you fixed pension for the entire term.
Monthly income vs. buying a plan
Many people just buy pension plans to feel to be secured. If you spend Rs. 40 thousand today per month, how can you expect that by paying just ten or 20 thousand, you can have the desired corpus? The second matter of concern is – if Rs. 20 thousand is enough for you today, will you be able to maintain the same standard of living, with the same amount after 10 years from now? So first you should know how much corpus you need for your retirement and then plan. Plan your monthly income instead of just buying a plan, which will not be sufficient.
Taxation of Pension plans
There are very few pension plans in India which have triple E benefits of taxation – Exempt, Exempt, Exempt. First – when you invest your investment is tax free, second – your income on investment is tax free, third – your maturity is tax free. In general these plans in general have EET benefits, these fall in deferment of Tax and the entire maturity proceed from these plans are taxable in the hands of an individual at the rate of applicable slab. Pension from these plans are also taxable. Only one third part of purchase price after the end of investment term, tax free
Financial Management at retirement
In the process of financial management for better control on your life planning is the first step, of plan and act; you need to manage your entire wealth in the manner that every single Rupee is planned. Your wealth should be growing at least with inflation after paying taxes, so that you have your purchasing power. One cannot depend on pension plans only. There are many other asset classes and investment instruments which take care of your real return. Like Public provident fund, Superannuation, New Pension Scheme, Mutual funds, Real estate and many more. Rental income is one of the better options for retirement income. As these care of your growing needs, year on year. You should plan your life in total to take better control of your own life and to determine the fate of your family. Your retirement is the start of your own life, with proper planning you can live your life really king size.