Since our living standards constantly improve along with the growing inflation, the retirement days could be a bit challenging for all of us. Hence, you must have a source of income apart from your savings to be financially stable in the absence of your job.
Pension plans are an effective source of income that could provide you with funds in the future. So, you should have a pension plan to face any unexpected expenses related to home, health and children and prevent financial burden.
Here are some essential factors that you must know about pension plans.
- You Must Start Saving Early
Pension plans are made to have financial autonomy and provide the public with a retirement pension. Therefore, if you start investing at an early age, then there won’t be any burden later to invest vast amounts of funds. So, you should start saving as early as possible.
- Accumulation Period
The accumulation period is the time duration when you will be required to pay the premium amount. The funds will accumulate simultaneously with time building up for you a sizable corpus.
- Buying Annuity Is Compulsory
An annuity is a contract made between you and the insurance company. You are required to pay a lump sum amount to get in return the regular disbursements. While buying a pension plan, you must purchase an annuity plan for 2/3rd of the accumulated corpus.
- Pension Plans Are Not Flexible
Pension plans are prematurely existing long term contracts that are inflexible. It means that you can not even withdraw the amount in case of a financial emergency. It is one of the significant drawbacks of a pension plan.
So, if you won’t continue investing, you should not choose a pension plan.
- What Figures Exist In A Pension Scheme
Mentioned below are some important figures that are involved in a pension scheme.
- Promoter: The person who promotes the creation of a pension scheme
- Participant: A natural person in whose interest you create a pension scheme
- Beneficiary: The person who receives the pension in the absence of the participant
- Insurance Company: The commercial entity responsible for managing the pension funds
- Depository Company: The financial entity that looks over the custody and other assets integrated with pension funds
- Regular Pension Plans Don’t Offer Tax Benefits
When you pay a premium in pension plans, you get tax deductions. Therefore, when a pension is paid within the annuity period, it becomes subject to taxation based on super senior citizens’ tax rate slabs.
- Low Diversification
Since you won’t have more than one pension plan, the portfolio would have a higher concentration, and the diversification also becomes low.
The Bottom Line
Pension plans are necessary for meeting your future financial requirements. Thus, you must be completely aware of every aspect of the pension plan as you would be investing for your retirement, and it should be beneficial for you.
Furthermore, you are also supposed to be familiar with the above-stated points to complete knowledge about pension plans.