Pension Plans & Their Tax Benefits

By | October 23, 2017

A constant flow of income is important even after you retire. This ensures that you can comfortably maintain your lifestyle in your golden years. Here’s your introduction to pension plans.

Pension Plans & Their Tax Benefits

Imagine not having an income source after retirement. Sounds awful? That’s the reason why you must ensure that you have a constant flow of income, especially if you want to have a comfortable retired life. You might need a good amount of money if you are looking to maintain the same lifestyle you had when you were working.

There are several pension plans up for grabs in the market. Pension plans cover your post-retirement expenses and also offer various tax benefits. Here’s your introduction to pension plans.

What are pension plans?

Pension plans are also known as annuity plans. They offer pensioners a regular source of income. Investors in a pension plan can choose the date from when they can begin to receive the pension.

There are different types of pension plans that insurance companies offer.

Immediate Annuity

An immediate annuity plan requires a person to make a single lump sum investment. They will then receive a periodic payout known as pensions for the remainder of their lifetime.

  • How frequently are pension payments made? These pension payouts can be made on a monthly, quarterly, bi-annual or annual basis.
  • Who should opt for Immediate Annuity Plans? Immediate annuity plans are perfect for people who want to ensure that they receive a regular income even after they put their feet up.
  • Are there any drawbacks? The primary negative factor about immediate annuity plans is that once you have invested in the plan, you cannot liquidate your investment or cancel the annuity plan.
  • What are the returns on immediate annuity plans? Remember, the returns on these plans are not fixed and can vary. You can choose to get higher returns on the annuity plan for a specific number of years but thereafter, you will continue to get an annuity, at a lower rate.

Additional Reading: Investing In Your Golden Years

Deferred Annuity

This is a type of annuity plan that delays income payments until the investor chooses to receive them.

There are two important phases in a deferred annuity plan. These are the savings or accumulation phase and the income phase.

  • Accumulation phase: In the accumulation phase, the policyholder pays the premium regularly for a certain number of years.
  • Income phase: During the income phase, the policyholder is permitted to withdraw 1/3rd of the money accumulated. The remaining money is utilised to purchase an annuity product. This will generate regular income for the remainder of the policy holder’s lifetime.

Additional Reading: Tax Exemption Guide For FY 2016-17

There are two types of deferred annuity plans.

  • Traditional retirement plan

In a traditional retirement plan, the investment is primarily made in debt instruments such as government securities. These financial investments have relatively low-risk levels, making these a good option for investors who are not too comfortable with taking risks with their investments.

  • Unit Linked Pension Plans

Unit Linked Pension Plans are ideal for investors who want to start planning for retirement early. With Unit Linked Pension Plans, an investor can choose their investment allocation from different asset categories like debt and equities among others.

Additional Reading: What Are The Best Ways To Invest After Retirement?

Tax benefits of pension plans

Depending on the type of pension plan you choose, you can get various tax benefits. This section was introduced in the Income Tax Act in an attempt to encourage investments in pension plans. An investor can claim tax deductions up to Rs. 1,50,000 per year under Section 80CCC of the Income Tax Act.

Tax benefits on withdrawal

You can withdraw up to 1/3rd of the accumulated pension without having to pay any taxes.

Remember, it pays to start your retirement planning early.

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