What is a Pension Plan and How It Works?

May 29, 2019

what-is-a-pension-plan-and-how-it-works

To ensure that you can live a financially secure life even after your retirement, it is essential to start planning for your golden years as early in life as possible. Fortunately, there are different types of pension funds available in India. While the ultimate goal of these plans is to help you live independently after retirement, it is essential to understand the working of different plans to select one that best suits your requirements. So, what are pension plans? How do they work? Let us have a look.

What is a Pension Plan?

Retirement plans or pension plans generally come with multiple benefits such as insurance cover and investment. These plans require you to pay a fixed amount regularly over a specified duration. When you retire, you can then receive a constant flow of pension on a monthly or yearly basis. Some of the plans also offer lumpsum maturity amount on retirement. It is essential to start investing in one such pension scheme at an early age to take advantage of the power of compounding. Over a period of 30-40 years, this will ensure that you have an adequate corpus to tackle the consistently rising inflation of the country efficiently. From your lifestyle requirements to healthcare costs, all your post-retirement expenses can then be easily managed with your pension income.

Working of Pension Plans

Now that you’ve understood the pension benefits, let us have a look at how they work. As there are different types of plans available, their working differs too. Let us try to understand the working of pension plans through an illustration of an investment pension plan such as a Unit Linked Pension Plan.

Let’s assume that you are 32 years old and earning Rs 50,000 per month. If your expected lifespan is considered as 80 years and you want to retire at 60 years, how much do you think you need to invest every month until your retirement to receive a monthly income of Rs 50,000 after retirement?

If inflation is considered at 6%, you will need a corpus of about Rs 7.15 crore to receive a monthly income of Rs 50,000 after retirement. If you start investing in a Unit Linked Pension Plan now and if the returns until the age of 60 are considered to be 12% and after retirement as 5%, you need to start investing around Rs 26,000 per month now to reach the target.

If everything is kept as it is and you start investing at 30, the monthly investments will fall to around Rs 20,000. This is how investing in a pension plan early, is beneficial. Moreover, if manual calculations are confusing, you can also find online pension calculator to know your monthly investment amount.

Selecting the Right Pension Plan

The benefits of pension plans and their working vary significantly based on the type of plan you choose. To make the right decision, it is essential to understand the advantages and working of different plans thoroughly.

If you are unable to make a decision, you can also get in touch with a top insurance provider to know more about the popular plans. The insurance provider can help you pick the best based on your needs and expectations.

 

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