Importance of Pension Plans

Last Updated: 3 May 2023

Pension plans serve as a means of financial stability and security after retirement. It is an insurance plan providing financial coverage for your old age and is sponsored by the company fund. In other words, a certain amount of your current income is transferred and stored for your future. This money is then given to the employee as the pension fund on retirement.

Types of pension plans

There are two types of pension plans: First, is the Defined benefit plan. Under this plan, the company guarantees a fixed beneficiary amount to the policy holder, irrespective of the investments made. Second, is the Defined contribution plan. Under this plan, the company guarantees a certain amount, but the final amount depends on the investment/contribution made.

Why are pension plans needed?

With age, we lose our potential to work and earn salary on a regular basis. The moment one feels that he cannot continue working on regular basis, or reaches a certain age, he prefers to retire. In such a situation, pension plans prove to be of great help as one can maintain and continue living the life he was prior to retirement. To get maximum benefit and live a tension free life post retirement, one needs to plan early for a pension plan. While buying a pension plan, one needs to pay a huge sum of money. This is because a major component of the plan is fixed and the rest is used for buying annuity. This annuity helps in paying you the pension amount regularly.

The earlier you start the better it is for your old age. Based on the amount invested, you will receive your pension amount. Meanwhile, you will get tax benefits as per Income Tax Act, 1961.

As the terms and conditions of pension plans are complicated, it is prudent to take expert advice. The expert will brief you on the benefits and the amount to be invested in order to get the maximum benefit.

As the concept of joint family is on the decline in India, post retirement planning is must to have a tension-free and independent life. A successful financial back up plan for post retirement life can solve most problems, if not all.