A pension plan is a long-term investment strategy that hopes to protect your wealth and ensure a sufficient income in your retirement years. The prospect of a pension seems appealing to most people, but it can be difficult to make the right decision in planning retirement. There are many myths about pension plans that need to be busted before you commit and choose the best investment plan for your retirement.
MYTH #1: I am too young to buy a pension plan
Pension plans aren’t just for retirees—they’re also great financial tools to help those at the beginning of their careers. They provide several great benefits, including the ability to save money on taxes.
If you invest in a pension plan, you can deduct up to Rs. 1.5 Lakh in your tax liability each year from your gross income. Additionally, your investments will grow tax-deferred until they are withdrawn (at which point they are taxed as ordinary income).
Your assets can be invested across a range of asset classes such as stocks and bonds, and this allows you to make adjustments based on your tolerance for risk and current needs (for example, moving more into bonds if you are nearing retirement age).
Pensions also have flexible access: withdrawals can typically be made at any time prior to retirement age—though it may be best to hold off until then so that you can reap the full benefits of tax-deferred growth.
But perhaps most importantly, starting early is key when it comes to pensions—the earlier you invest in one and begin reaping the benefits of tax-deferral and compound interest, the better off you’ll be.
MYTH #2: I don’t need a pension plan, my family will take care of my financial needs in old age
While you may believe that your family will take care of you in old age, it can be difficult for them to do so. For example, they themselves may have their own financial commitments and may not be able to afford to support you adequately.
This can be a source of significant emotional burden on your family members as well. A pension plan allows you to set aside money at an early stage of life which will allow you to live independently without being a financial or emotional burden on your loved ones.
MYTH #3: I already have a life insurance policy and emergency corpus, so I do not need a pension plan
No. You need a pension plan.
A life insurance policy and a pension plan are not the same. It is also not the same as your bank balance or any other investment that you may have created for yourself. All of these financial instruments are complementary in their own way to make sure that you achieve financial security through different stages of life.
While there are numerous benefits of building an emergency corpus, it will be limited in nature since you generally use this corpus for short-term goals like emergencies, vacations, or even buying gadgets. It does not provide regular income post-retirement, which is one of the biggest advantages of buying a pension plan today.
Benefits of a Pension Plan
There are many benefits of participating in a pension plan. Some of the most commonly cited include:
1. Provides guaranteed income after retirement
If you’ve been paying attention, then you already know that a pension plan is like an investment option, but it also offers guaranteed income. The policyholder’s funds are invested in safe securities like debt instruments, and after retirement, the holder receives a steady stream of income based on the plan’s terms.
The amount is pre-determined at the time of purchase, and the policyholder gets to choose whether they’d like their payouts to be monthly or annually. What’s more: any money that you receive from your pension is tax-free.
2. Prepares you for an emergency
Pension plans provide a lump sum amount on maturity, which can admittedly be converted into a regular income stream by investing in an annuity plan. However, this lump sum amount is also useful to fund any emergency that you may face until your retirement age, such as medical emergencies or even the purchase of a new home or car if you have to move cities mid-career.
They also offer life cover through their term insurance component which is applicable from the time of taking the policy till the date of maturity of the policy. The coverage can vary depending on what your requirement may be at that point in time and how much money you need to protect them against all potential emergencies in life, especially if it’s premature death.
3. You can customize your pension plan
When you sign up for a pension plan, there are provisions that allow you to draw money from your account. These provisions vary from pension plan to pension plan, but the implications can be significant. If you withdraw money from your plan through a hardship withdrawal, it reduces the amount of money you will get after retirement.
This is obviously not something anyone should consider until they have some serious cash on hand—an emergency, for example. If all else fails, and your life is in danger due to an illness or car accident, then withdrawing money may be a reasonable way to go.
4. Improves returns on your savings via tax-saving options
One of the ways to improve returns on your savings is via tax-saving options within a pension plan. In this context, it means reducing taxable income by investing savings in a pension plan and also increasing investment returns via any applicable employer contribution matching schemes. This will also reduce the amount of personal income tax payable on earned income and capital gains tax payable in retirement.
Final Words
A pension plan ensures that you have enough money to live a comfortable retired life. With a pension plan, you can continue living your life the way you want even after retirement.
Moreover, it helps you ensure the financial stability of your family for their future endeavors like marriage, education, etc. You will also get tax benefits on the premiums paid towards your pension plan.
So buy the best investment plan for your retirement today and secure your family’s financial future
