Venkatesh, a resident of Bangalore, was shocked when he enquired the price of flowers during the festive season, a few weeks ago. He was asked to pay Rs 50 for a small quantity! What surprised Venkatesh was the fact he could afford to buy same flowers for a cost of Rs 0.50 (yes, you read it right) less than a decade ago. For a man preparing for a retired life 10-15 years from now, this was worrying news.
In fact, retirement as a concept should get its due share of respect and time has come for all of us to put our mind on the subject. Not only because the price of goods and services we buy will keep increasing but also because we have to pay for them even when we don’t have the luxury of salary income. With life expectancy steadily increasing over the years, many of us may end up having a post-retirement life which could be equal to our working years!
While the above scenario may look scary, the good news is that we also have products which help us to tide over the challenging phase. The perfect example is pension plan which ensures steady flow of regular income as long as the investor is alive.
How does a pension plan work?
As the name indicates, the objective of the product is to provide pension income to the investor during his life for which he makes contributions during his income (earning) years. As a result, one should start looking at the pension plan at the earliest as longer the tenure, larger would be the corpus. At the end of the premium paying term, the customer has the option of withdrawing 1/3 of the corpus amount and choose to receive annuity or receive pension for the rest of his life.
Needless to say, an investor who thinks about retirement at the age of 25 can afford to invest as little as Rs 20,000 per annum as he has the luxury of contributing for a period of 25-30 years. On the other hand, an investor who thinks about retirement at the age of 45 does not have the same luxury as he may not be able to work for 25 years due to various reasons. Hence, he may have to shell out a minimum of Rs 2 lakh per annum to manage his post-retirement life.
In fact, financial goal is an important aspect of retirement planning as the amount saved during working life should take care of the needs of the investor when he does not save. So, the best way to go about is to arrive at the cost of living at current level. Then factor in inflation over the long term which will be equivalent to the current expenditure. As you observed earlier in the case of flowers, the cost does not remain the same. Through pension plan, the problem of inflation will be tackled as the money saved during working life grows over a period of time.
One of the arguments against pension plans is that why go for a pension scheme when an investor can invest in various other products like equity schemes or fixed deposits and manage on his own. The answer is simple. Pension scheme is the only product which ensures regular income without the hassles of money management. In the case of pension plan, an investor needs to only invest during his income years. After the end of the term or when he requires pension, the company takes up the responsibility of paying pension as long as the investor is alive. No other product ensures such facility. This should prompt all of us to sign up for the pension plan
Key features of a pension plan-
- Start investing in a pension plan at the earliest. Every delay means less pension income in the long term.
- Pension contribution is a long term commitment; hence avoid discontinuance.
- Sign up for a pension plan in line with your long term needs. It should ideally be part of your overall financial planning.
- Check if your pension plan allows flexibility in terms of top-up facility, annuity options, etc
- Contributions to a pension plan come under Section 80C. It can be part of your overall tax planning