Retirement is a turning point in a person’s career after decades of hard work and career advancement. It also marks the beginning of a life in which people prefer to spend quality time with their loved ones and look forward to other activities that they had to put on hold in the past due to life’s responsibilities.
However, a lack of consistent monthly income can affect your budget and, as a result, your savings. As a result, there must be strong financial backing that provides guaranteed benefits in the form of regular payment, such as retirement plans In India.
Retirement and pension plans provide a steady stream of income during retirement, thanks to the money accumulated during the years of work. Despite rising costs of living, a retirement plan can allow your family to maintain its standard of living without your monthly paycheck.
Plus, proper retirement planning lets you manage unforeseen needs without stress. So if you’re starting to plan your life after retirement, here’s what to know beforehand!
How do retirement plans work?
Retirement plans are pension plans that require you to contribute to a pool of funds that will be set aside for your future benefit. This fund is invested on your behalf and the results generate income for retirement.
They are essentially a form of investment or savings designed to meet your future retirement needs. There are numerous retirement plans available in the market to ensure that various financial requirements are met. However, their features, benefits and exclusions, among other things, may differ.
Generally, retirement plans in India are divided into two phases:
- The first phase of the process includes premium accrual, in which you (the insured) pay the premium.
- The distribution phase follows. In the distribution phase, you are provided with a regular income through an annuity plan once you retire. An annuity plan is a type of insurance that pays you immediate income based on the options you select.
Let’s understand some features and benefits of retirement plans in India:
Acquisition of age
The age at which the policyholder of the retirement plan begins to receive a monthly pension is called the consolidation age. In most circumstances, the minimum age for the acquisition of rights is between 40 and 50 years, with some flexibility up to 70 years. For some companies, the vesting age can also be increased to 90 years.
An investor can pay the premium in monthly installments or all at once as a lump sum investment. Over time, wealth will accumulate together, resulting in a significant corpus, including investment and earnings.
For example, if you start investing in your 30s and continue into your 60s, you will have invested for 30 years. This corpus is where most of your pension for the chosen period comes from.
Investors sometimes confuse it with the accumulation period. This is the time after you retire when you start receiving your pension. For example, if a pension is received between 60 and 75 years, the duration of the payment will be 15 years.
Most of the retirement plans in India maintain this distinction of the accumulation period, while some allow partial or full withdrawals during the accumulation period.
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Depending on how you invest, you can earn regular and stable income after retirement or immediately after investing. This ensures that when you retire, you will be financially self-sufficient. You can use a retirement planning calculator to get an approximation of the funds that will be sufficient for you after retirement.
Pension plan policyholders are eligible for tax exceptions under Section 80C of the Income Tax Act of 1961. The tax benefits associated with retirement plans can make it easier for you to start planning early in life. This will also help you beat the impact of inflation in the long run.
Some insurance companies offer retirement plans that allow policyholders to withdraw their pension funds while they are still in the accumulation stage. This feature ensures that you are always prepared in the event of an unforeseen emergency. Most importantly, it prevents you from depending on banks for a loan in such situations.
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