Every individual that plans their investments has to account for pension schemes as well. This is crucial as they ensure that investors have a comfortable and financially secure future. Pension schemes also allow the investors to be prepared for any unforeseen circumstances like medical emergencies which are quite usual in old age. However, planning for retirement is easier said than done. With the multiple options available today, the decision to opt for the most profitable and secure pension scheme is not easy.
Given below is a list of factors that can be considered by investors while selecting pension schemes to ensure that it meets all their requirements and provides a healthy corpus too for a comfortable post-retirement life that they can thoroughly enjoy.
What is a pension scheme?
Pension schemes or retirement plans are a fund with usually fixed maturity in which the investors invest specific amounts periodically. At the time of maturity, investors can withdraw specified amounts at regular intervals or can receive the entire corpus along with any interest accrued thereon. These plans are ideal for senior citizens in their retirement as it provides them with a regular and stable income to meet their routine obligations as well as help them in case of any emergencies.
These pension schemes are long-term investment options that also come with insurance plans. Investment in these plans is usually flexible where investors can invest either on a monthly basis or quarterly depending on the investment. Most plans require investors to make a regular basis to keep the investment alive, failing which the investment will lapse and investors will not get maturity benefits from the same.
Also Read : A guide on National Pension Scheme
Why does one need pension schemes?
Retirement is a stage that every individual goes through. Some go through it when they reach 60 or 65 while some at a later age. However, at this stage, it is difficult to work as before due to physical, mental, and health-related constraints. Having a pension scheme that provides retirement benefits allows the individual to lead a comfortable life in their post-retirement period without being dependent on their children or others. It is also important to understand that having mere savings throughout life may not be enough to meet all the obligations on retirement. Therefore, investing in pension plans allows their savings to grow over the tenure of investment. The case of money generating money is the most efficient way to build a corpus and the power of compounding accelerates it further. A sound pension scheme will meet all the financial obligations of the individual as well as have room for any emergencies or other retirement goals like travel, holidays, etc.
What are the factors to consider while purchasing a pension scheme?
We have established the importance of pension schemes above. Let us now understand the key factors that need to be considered while planning or purchasing a pension scheme.
- Routine or monthly expenses in the post-retirement period
The first and foremost consideration should be the monthly expenses that are part and parcel of life. This is the most basic requirement and cannot be ignored. Individuals can look at the current monthly budget and have a fair estimate of what they may need another 15-20 years down the line. A sound pension plan should be able to cover the routine expenses in the post-retirement period apart from any financial emergencies.
The current expenses for basic necessities and other luxuries will not be the same in the post-retirement period. The reason for the same is inflation. Today the world as a whole is battling inflation and a sound pension scheme should also account for the same. Most experts believe that individuals should look at their annual income and have at least 80% of the same in their post-retirement period. Accounting for inflation will help individuals have a realistic corpus at the end of their working life that can meet their true financial obligations in retirement.
Pension schemes often come with tax benefits. This is to encourage people to save more and invest more in pension schemes so they can have a secure financial future. Investors should therefore look for schemes that offer maximum tax benefits and at the same time acknowledge that saving tax should not be the sole purpose of investing in pension schemes. When tax saving is the sole focus, investors often ignore the real benefits upon retirement which ultimately defeats the purpose of a pension scheme.
- Outstanding financial obligations
Individuals in the post-retirement period usually do not have any huge financial obligations like loans. However, there is always a chance that a person still has a couple of years of the balance loan amount that may be wrapped up soon. In any case, a pension plan should account for these outstanding financial obligations too so that at the time of retirement, the individual is not faced with the consequences of not meeting them.
- Different investment options
There are multiple retirement-centric investment options available today for investors to choose from. The criteria to choose an investment option should be the amount of corpus that will be available upon maturity as well as the risk of investment among others. Investors need to understand the returns as well as the finer points or conditions of investment for each available option of pension schemes and choose a plan accordingly that meets all their expectations.
- Covering for medical emergencies
Medical emergencies are a fact in the post-retirement period. Right from routine examinations or preventive health checkups to any medical emergencies, the cost of medical expenses is going to be high in retirement. Therefore, the pension scheme should accommodate such high expenses in a reasonable manner so as to ensure that retirees get the best medical attention whenever needed.
Pension schemes are a necessity for every individual and not something that can be avoided. We have often seen in India that an average person does not give retirement planning enough importance and often ignores it till the very last minute. At such a time, buying a pension scheme after considering all the above factors will not provide adequate benefits. Hence, it is important to plan for a pension scheme well in advance and consider all the factors mentioned above to have an effective one in the post-retirement period.
Pension schemes provide multiple benefits like tax benefits, insurance cover, liquidity, multiple payment options including guaranteed income at periodic intervals, long-term investment benefits, death benefits, accidental benefits, etc.
Some of the pension schemes available in India are,
-Deferred annuity plan
-Immediate annuity plan
-Certain annuity plan
-Guaranteed periodic annuity
-Life annuity pension plan
-Life ULIP Plan
By using a retirement calculator, an individual can estimate the amount needed to invest today to get the estimated corpus upon maturity.
The usual retirement age in India is between 58 years to 65 years depending on whether the individual is working in the public sector or private sector enterprise.