A guide to better understand how Pension Plans work
If your future financial security concerns you, then a pension plan is the answer to all your worries. A well thought out pension plan is your ticket for a secure and comfortable life after retirement. A pension ensures you have a steady income while you sit at home enjoying the fruits of years of labor. Its importance can in no manner be undermined.
Just some of the reasons why a retirement plan is important:
- You and your family's basic needs cannot be compromised upon. Food, clothes, utility bills, etc. will be covered by the income you will receive post retirement. You will not have to depend on your children or other relatives.
- Medical emergencies come unannounced. A steady income should take care of you and your loved ones during such situations.
- You may have plans to vacation abroad or travel to meet your children that stay far away from you. A smart pension plan will only add to your convenience.
- A pension plan will more importantly let you lead a financially independent life.
Likewise, a pension fund will help you meet your specific goals. You will know what the future holds for you.
Let us understand the types of Pension Plans and what they mean for you.
Your pension fund is where you accumulate some part of your income during your employment years (also known as the 'accumulation phase'). It is from this fund that you draw income after your retirement ('distribution phase').
Pension Plan may be categorised in the following way:
- Deferred Annuity Plan: There are two phases to this kind of plan. A fixed amount - premium - is what you keep paying into your fund. This is the first phase - also known as the accumulation phase. The second part is where you start receiving your payment - also known as the income phase. The payment phase is deferred until retirement or when you choose to.
- Immediate annuity plans: This type of plan is where you invest one big sum. A fixed income is paid back to you almost immediately after the formulation of the plan.
The different types of plans an insurance company may offer include Annuity Certain & Life Annuity with return of purchase, Life Annuity, Joint life with last survivor annuity, Joint Life Last Survivor Annuity with return of Purchase Price, Increasing life annuity and Increasing life annuity with return of purchase price.
Annuity Certain - This plan ensures you receive the decided amount of money for a fixed period. In this span, if the person dies, then the nominee that the person chose will continue receiving the specified amount of fund for the fixed duration.
Life Annuity - Under this option, annuity shall be payable at a constant rate throughout the life of the annuitant.
Life Annuity with Return of Purchase Price - Under this option, annuity shall be payable at a constant rate throughout the life of the annuitant. In case of death of the annuitant, the annuity payments will cease and the purchase price shall be payable to the nominee or beneficiary.
Joint Life Last Survivor Annuity - Under this option, both primary life and spouse are annuitants. The annuity payments shall be payable at a constant rate as long as one of the annuitant is alive. Annuity payments shall cease on death of the last surviving annuitant or on simultaneous death of both the annuitants.
Joint Life Last Survivor Annuity with return of Purchase Price - Under this option, both primary life and spouse are annuitants. The annuity payments shall be payable at a constant rate as long as one of the annuitant is alive. In case of death of the last surviving annuitant or in case of simultaneous death of both the annuitants, the purchase price shall be payable to the nominee or beneficiary.
Increasing Life Annuity - Under this option, the amount of annuity payable shall increase at certain rate compounded per annum and shall be payable throughout the life of the annuitant. In case of death of the annuitant, the annuity payments shall cease.
Increasing Life Annuity with return of Purchase Price - Under this option, the amount of annuity payable shall increase at certain rate compounded per annum and shall be payable throughout the life of the annuitant. In case of death of the annuitant, the annuity payments shall cease and purchase price shall be payable to the nominee or beneficiary.
With the different plans that you can choose from and the immense benefits, a pension plan is an investment worth every effort.
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