Retirement planning is essential to ensure a comfortable lifestyle after you hang up your boots. Start planning for retirement early in your working life and you can benefit from having that much more time to save up money.
So, if you are ready to put away something for your golden years, let us tell you about the pay-out options on retirement savings.
There are several retirement savings options available to investors who want to build up a retirement corpus. You can consider a Public Provident Fund account, National Pension System account or, if you are employed, you probably already have an Employee Provident Fund account.
Whatever retirement savings plan you choose to invest in, you will be eligible to receive an annuity at the end of the Investment tenure. After you retire you will receive these payments at regular intervals. Call it a pension, if you will.
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When considering a retirement plan, it is important to be clear about the plan’s maturity benefits and pay-out options. You may have to choose between getting a regular annuity or a deferred annuity.
Let us help you decode these two pay-out options.
Defining immediate annuity and deferred annuity
Immediate annuity plans
You can get an immediate annuity plan on paying a lump sum amount. An immediate annuity plan gives you a regular, assured income. The payments in an immediate annuity plan can be made, as the term denotes: immediately after retirement and can continue for a specific time period or for the policyholder’s lifetime.
Deferred annuity plans
A deferred annuity plan allows you to save for the future and your post-retirement years too. The pension payments under a deferred annuity plan commence after a specific date. If necessary, you can choose to convert a deferred annuity plan to an immediate annuity plan.
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Different annuity plan options
There are several options available under annuity plans. You can choose to receive the pension from annuity plans for a defined period of time or over the remaining duration of your lifetime.
There are also joint annuity plans wherein the spouse can be nominated to receive the annuity on the demise of the pensioner.
What to remember when buying annuity plans
An annuity plan helps you better plan your retirement savings. The pay-out on Annuity Plans depends on whether the policyholder has chosen to receive a fixed or variable income. For instance, if a 30-year old is aiming to get a monthly income of Rs. 1 lakh after retirement at age 58, he will need to invest a sum of Rs. 16,000 every month, assuming a return of 8% per annum.
Tax benefits of Annuity Plans
An investment in an Annuity Plan is exempt from tax. Any money invested towards annuity is also exempt from tax.
Pensioners are permitted to withdraw 25-33% at annuity. This withdrawal is considered tax-free. However, the income received from annuity plans is taxed as per the investor’s applicable tax bracket.
Senior citizens are not taxed if the income they receive is below their applicable tax slab.
In case senior citizens have any source of taxable income, then the provisions of Advance Tax will be applicable.
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Charges on Insurance Annuity Plans
Many Life Insurance companies offer Annuity Plans. There are various charges applicable on Annuity Plans with regards to fund management, policy administration and asset allocation of the policy for Unit Linked Pension Plans.
Did you know? The New Pension System has the least charges of 0.25%.
In case an investor withdraws money from the Annuity Plan before the completion of the tenure, the withdrawn funds become taxable.
For Unit Linked Pension Plans, you are permitted to make withdrawals only after the completion of the 5-year lock-in period.
BB Tip: If you have an Insurance plan from a Life Insurance provider, you cannot get a Unit Linked Pension Plan from the same insurer.
Now that you have a basic idea of the pay-out options that are available on retirement savings plans, it’s time to be smart about starting your retirement fund.
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