Insurance » Retirement Plans

Retirement Plans

Retirement plans are also known as pension plans. A pension plan or an annuity is an investment that is made either in a single lump sum payment or through installments paid over a certain number of years, in return for a specific sum that is received every year, every half-year or every month, either for life or for a fixed number of years. Annuities differ from all the other forms of life insurance in that an annuity does not provide any life insurance cover but, instead, offers a guaranteed income either for life or a certain period. Typically annuities are bought to generate income during one's retired life, which is why they are also called pension plans. By buying an annuity or a pension plan the annuitant receives guaranteed income throughout his life. He also receives lump sum benefits for the annuitant's estate in addition to the payments during the annuitant's lifetime.

Importance of retirement plans:

A retirement plan is an assurance that you will continue to earn a satisfying income and enjoy a comfortable lifestyle, even when you are no longer working.

Independence is the new way of life: An increasing number of young Indian professionals are moving away from the traditional joint family structure. Since support no longer comes easily, parents have realized the need to provide for themselves during their retirement years.

Costs set to soar: Skyrocketing costs can prove a major deterrent for future of salaried and business people. With rates rising everyday, you can imagine how high they will be when you are ready to retire. A retirement plan provides you with a steady income every month, to arm you in the face of rising costs.

Non-earning retirement phase is now longer: Only 4% of India working population- mostly government employees - are covered by pensions. The remaining 96% comprises self-employed and salaried professionals who do not have a formal, mandated provision for pensions.

Types of retirement or pension plans:

You can allocate funds among the Employees Provident Fund (EPF), Public Provident Fund (PPF), Post Office Monthly Income Scheme (POMIS), systematic investment plans (SIP) of various mutual funds (they allow you to contribute a sum of money regularly, like a recurring deposit scheme), the UTI Retirement Benefit Plan, the Franklin India Pension Plan or pension plans offered by various insurance companies. You can opt for a market-linked plan that operates much like a mutual fund or a simple plan that allows you to pay a fixed premium every year and gives the option of taking an annuity at the end of the contribution period. But, you must always consider the positives and negatives of every policy before settling to choose one. You ought to keep the retirement benefit plans in mind when making your choice. It would depend on the amount you can save, the return you are looking at, your risk appetite, your age and the income bracket you are in so that you can maximize your returns by leveraging all possible tax benefits. The uncertainty over the interest rate makes it difficult to arrive at a cut-and-dried strategy for long-term asset allocation.

Making an informed choice:

Depending on your life stage and level of income, many life insurance companies structure pension schemes on three models. All three models aim for maximum retirement benefit plans in terms of life insurance, tax benefits and inflation correlation.

» The risk-averse model -- If you are in the late-thirties-early-forties, then a risk-averse portfolio will suit you.

» The balanced model -- A balanced investment pattern is ideally suited for an individual in the mid-thirties as you should have growth opportunities and also more number of years to retire. This retirement plan is highly beneficial offering you flexibility and diverse retirement benefit plans. You may choose a few pension plans offered by insurers and mutual funds with a bias towards equity (say, 30-40%) after considering the taxation and other aspects. These schemes should account for 40% of your portfolio, the rest being fixed-income securities. This portfolio may approximately generate a return of 9.4%.

» The high risk model -- If you are below thirty, and have a comfortable 25-30 years for retirement, you may go in for a portfolio with 60% equity tilt. Choose an appropriate mix of market-linked plans, mutual fund pension plans or SIP of an equity fund. The portfolio may generate 11% return.

For optimal retirement benefit plan returns, no matter what age, you need to choose now and start securing your retirement future. Once you have done so, your work is not finished as you need to constantly monitor your portfolio.