What is a Pension?
The english dictionary defines the word pension as “a fixed amount, other than wages, paid at regular intervals to a person or to the person’s surviving dependents, especially to a person retired from work.”
A pension is just one way of saving for retirement. Some people choose to invest in property, some in shares and some in pension plan. But why do I need pension – lets find out?
Why do I need a Pension?
These days, people are living increasingly longer and expecting more from their retirement. So by the time you get into your 50s or 60s the chances are at some point you’re going to want to stop working. You’re not going to want to carry on working through your 60s into your 70s. Average life expectancy (in India) now for men and women is around 65 – slightly more for women, slightly less for men. So you won’t have your usual money coming in. So you need to save for those years, pension is saving for your retirement. But what is a pension plan – lets find out?
What is a Pension Plan?
A pension plan is a long-term investment designed to help you achieve the level of savings and income you want in retirement. When you choose to retire you will be able to withdraw an income from your pension to cover your living costs, or provide you with financial support.
In simple words, pension plans (also called as retirement plans) are offered by insurance companies to help individuals build a retirement corpus. On maturity this corpus is invested for generating a regular monthly income, which is referred to as pension or annuity.
How does a Pension Plan work?
In most pension plans, you will make regular contributions to your pension ‘fund’. Your contributions can then be invested with the aim of increasing the value of your fund. When you reach retirement age you can normally take up to 33.3% of your pension fund as a tax-free sum. The remaining funds in your pension plan can then be used to provide you with an income. This can be done by buying a pension annuity, which pays out a guaranteed, taxable income each month for the rest of your life.
What are the advantages of saving into Pension?
1- Tax Relief – The taxman will give following tax relief (under Sections 80C, 80CCC and 80CCD) to your pension contribution. The limit for maximum deduction (As per Section 80CCE) available under Sections 80C, 80CCC, and 80CCD (combined together) is Rs. 1,00,000/- (Rs. one lac only).
2- Tax-free Lump Sum – When you retire, you can normally choose to take less income and have up to 33.3% of your pension pot as tax-free cash and for the remaining 66.6%, you have to buy an Annuity Plan from LIC or Other Life Insurers.