Pension plans often known as retirement plans are the most common traditional individual financial plans that provide a regular monthly income during old age, thereby providing financial security to people so that they need not to be dependent financially on anyone. The very basic idea behind the initiative of implementing the policy of pension plans is – it often becomes practically difficult for some people to have a regular source of income by the time, they cross their serving age. At this age, it is imperative for them to be secured at least financially. However, in order to enjoy the benefits at a later stage, one has to bear the detriment of parting with their today in the form of monthly contributions towards their pension plan or a lump sum payment. Before discussing the advantages and disadvantages of pension plans, let us first understand the different plans prevailing in India.
Pension plans can broadly be classified into two categories of annuities:
1) Deferred Annuity Plan – In India, most of the plans you will come across are deferred annuity plans. In such plans, the accumulation phase is preceded by the distribution phase. But what is the meaning and relevance of these phases here? Let’s briefly delve into these phases.
Accumulation phase is when you are investing on a regular basis, may be at the end of each month to accumulate a sum of money. As a result of these savings, you will start getting monthly returns at a later point of time in your life.
Distribution phase is when you start reaping the benefits of the savings accumulated during the accumulation phase. These benefits may be in the form of regular monthly pension after you retire or it may be a lump sum withdrawal even before you retire.
Now, coming back to the deferred annuity plans, these plans are well suited to those who do not require immediate consumption of money and can comfortably part with their money in next few years to come. That is, they have got many years in their hands to be treated as accumulation phase wherein they can build up their corpus. Jeevan Nidhi and Jeevan Tarang by LIC, New Pension Scheme are some of the examples of deferred annuity plan.
2) Immediate Annuity Plan – As the name suggest, the returns starts emanating immediately from these plans. However, the investment in immediate annuity plans is made in lump sum. Therefore, if you have a large sum of money and you don’t find any other outlet for it, then you can invest it in these plans and you will start getting monthly pension/ annuity within one year of paying the one time premium, which is the lump sum amount in this case. LIC’s Jeevan Akshay II falls under the category of immediate annuity plan.
Pension plans offers various options:
1) Lifetime annuity with confiscation of purchase price – Pension will be made available to the purchaser till his death. In case of eventuality, nothing will be paid to the legal heirs.
2) Lifetime annuity with return of purchase price – Pension will be made available to the purchaser till his death. In case of eventuality, purchase price, i.e. the maturity amount will be paid to the legal heirs.
3) Lifetime annuity assured for certain number of years – Pension will be made available to the purchase up to certain number of years irrespective of his life or death. However, if the purchaser survives the specified period, he will continue to get pension till his death.
4) Last survivor annuity – Upon the death of the purchaser, the pension will be transferred on the name of his spouse. And when both of them die, the maturity value of the annuity is given to the nominee.
After understanding the types of pension plans and their advantages, now is the turn of disadvantages of deferred annuity plans.
1) The downside is, you will never encounter growth in your pension amount commensurate to market growth and inflation.
2) In case of any emergency, you cannot look out for pension money.
3) For some of the retirement plans, it is possible to withdraw only 1/3rd of the accumulated balance as tax free. You cannot withdraw the complete amount. For that reason, these pension plans are not flexible.
4) Often low rate of clarity is provided to the individuals over charges and fees towards these plans.
Each pension plan provider has their own terms and conditions. Moreover, apart from these pension plans, lot of other options has evolved in the market offering good returns. Therefore, it is better to closely monitor the various types of pension plans offered by different organizations before actually putting funds into it.