Planning for individual pension


By Mahesh Pai

In today’s challenging and competitive environment people forget to plan for their safe retirement life. A business owner is always running after money but forgets the main motive of getting into business which is providing a quality life for him and his family. He starts opening so many types of business so that if one business fails then he and his family should not get affected and their lifestyle doesn’t change.

They are constantly investing and reinvesting only in their business, and one of the biggest reasons for it is that they do not plan for pension. As per a report 88 per cent of Indians are going through bad phase during their retirement life. We need to understand the different types of pension and why individual pension is the most important. There are mainly three types of pension

Social pension

Social pension is always given by the government or the state when the citizen of that state retires. It is a facility available only for senior citizens and provided to them until they die. But in India with a senior citizen population of about 10 crore it is impossible for the government to provide pension to senior citizens.

Occupational pension

Occupational pension is when  employers provide pension to their employees post-retirement.  In India none of the private companies give occupational pension in fact even the government companies have stopped with occupational pension since 2004. However there are companies which provide their employees with gratuity after calculating all the years the employee worked. The gratuity is usually paid as a lump sum.

Individual pension

This is the most important type of pension. Individual pension is when you plan for your own pension. When you don’t get a social pension or an occupational pension you have to make it a priority and take charge to plan your individual pension plan. Under individual plan you can start getting your pension as and when you want, you don’t have to necessarily wait until 60. You can also retire early with the help of an individual pension but one cannot retire early before making a provision for an alternate source of monthly income.

Importance of individual pension.

Since life expectancy has increased retirement planning has become mandatory all the more. Taking an average, in the1980 people would die at the age of 55, in 2000s the life expectancy was around 61.3 years, in 2010 it was 66.6 and in 2020 it’s an average of 72. In future the calculated life expectancy is expected to be 85 or more.  One must now be ready to live a long life. The medical advancements, various medical treatment and your family isn’t going to let you die so early. People who were born before 1960 never did retirement planning but  longer expectancy in future will need more money for retirement compared to today.

Another major reason why we need to plan for your retirement is because of the lack of a social security system. There is No free medical services for senior citizens Senior citizen health care is costly Free pension is not provided by the government

Your income is going to stop one day but your expenses will continue. Retirement planning is no more an option but has become a necessity and you cannot consider your children to be your retirement plan. With inflation and increased standard of living the expenses for your children will be very high as compared to today. Don’t be a burden to them but rather be a support. A guaranteed monthly pension will let you and your family live stress free life tomorrow and for the days to come.

Guidelines before investing

Before investing into an individual pension fund you need to check whether the pension is taxable or tax free and also check if the pension rate is guaranteed or variable. This will determine the standard of living while you retire. There are mainly two common types of individual pension in India.

A combination of accumulation and allocation.

Wherein people accumulate money till the age of 60 and then invest it into a pension fund. It is the process of building the corpus for the purpose of retirement, eg SIP or PPF. Drawback: In the process of accumulation there arrives occasions where you need to withdraw your funds, it could be for child education,  marriage or business expansion.

Deferred pension plan

Here also you keep saving a certain amount of money and earn interest on it but only at the age of 60 you will receive the pension. Example NPS has become very popular financial instrument, Atal Pension Yojana for the people of age below 40 with a maximum of Rs 5000 pension. Drawback: Under NPS, pension rate is not guaranteed and the pension is taxable. Whereas Atal Pension Yogana does not give more than Rs 5000 pension. The average drop in the interest rates has been about 2.4 per cent every 10 years. And if the same thing continues then in the year 2030 you might get around 3%. It is never too early or late to start investing in retirement plans. However sooner, the better. Whether you are salaried or entrepreneurial, there are a variety of individual pension plans you can choose from as listed below.

Deferred Annuity- Here a lump sum or a systematic payment can be paid over a period of time. Pension begins after completing the term, no taxation (unless you withdraw the corpus)

Immediate Annuity- Only lump sum investment allowed in this plan and pension begins immediately after investment. The nominee can claim the pension or the entire corpus after the death of the investor

Annuity Certain- The pension is disbursed for a specific period. The investor can choose a period (say, age 65-70) and the nominee can claim the pension after the demise of the investor.

With Cover Pension Plan- Comes with a ‘cover.’ The investor’s dependents are entitled to a lump sum after he/she expires The investment amount is not large as most of the amount goes towards building the corpus

Life Annuity- Here the pension is paid until the death of the investor. However there is a ‘with spouse’ option where the spouse continues to receive the pension after the investor passes away.

National Pension Scheme (NPS) – This plan has been launched and managed by the central government. 

Guaranteed Period Annuity Plan- The investor will receive the pension only for a specific term like 5 to 20 years.

If you are a person who is looking for a safe and secured pension with over and above the prevailing interest rate then today is the time to begin. Don’t be a burden in your old age to your children but be their

strongest support.

The writer is a financial advisor and runs a consultancy firm, Mahesh Pai’s Financial Hub