While there are multiple tax savings investments that you can choose to save for your retirement, pension plans can prove to be an efficient retirement planning tool. Let us take a closer look at the various benefits of pension plans.
Immediate AnnuityAn immediate annuity plan is a guaranteed pension plan that requires you to make a one-time lump sum investment and receive a regular stream of income in exchange. In most cases the pay out from tax savings pension plans such as these can begin with immediate effect and are ideal if you wish to receive a regular income post retirement. You can set the pay-out frequency to monthly, quarterly, semi-annual or annual depending upon his needs.
The biggest pension plan benefits that immediate annuity plans offer is that the principal is tax exempt, while interest is taxed as ordinary income. However, once you have received the principal amount in full, payments are taxable albeit at a rate of interest based on your income at the time. As you are likely to withdraw the pension amount post retirement, it can be presumed that the interest rate will be low.
Deferred AnnuityDeferred annuity, kind of tax savings pension plans allow you to delay the payment of income till you choose to receive it. There are two phases in such a plan i.e. accumulation and income phase. In the first phase, you pay a regular premium for a specific number of years. In the second phase, you can withdraw one-third of the accumulated amount (that is tax free) and use it to purchase an annuity that generates a regular income for the rest of your life. Deferred annuity products are of two kinds:
Traditional retirement plans: These are low risk investment products that invest largely in safer debt instruments such as government securities. These plans are ideal for risk-averse investors.
Unit linked pension plansAs the name suggests, unit link pension plans or ULIPs allocate investments across different asset classes such as equity and debt in varying proportions depending upon your preference. ULIPs are market related instruments and thus have the potential of generating higher returns as compared to traditional retirement plans. Pension plans can be effective tax savings investments as contribution towards any pension plans up to the extent of Rs1.5 lakhs per annum is tax free under Section 80CCC of the Income Tax Act. Now that you are aware of pension plan benefits, it is wise to make an appropriate choice based on your risk appetite and begin your investment early to ensure a carefree second innings post-retirement.