Types of Pension Plans in India – Explained in Detail

Here, we will explain the different types of pension plans available in India. Select the right plan that suits your requirements and risk appetite. You can invest in any of these through ICICI Bank.

What is a Pension Plan?

A pension plan lets investors save money during their earning years and grow wealth through interest accumulation. Upon retirement, it turns your corpus into a long-term regular income by providing a steady cash inflow. As a result, you get sufficient funds to meet expenses and handle emergencies after retirement.

Types of Pension Plans in India

With financial planning, there is no “one-size-fits-all” concept. You must research and choose a plan that meets your requirements and goals. Here’s a look at the different types of pension plans in India:

National Pension Scheme (NPS)

The central government introduced the NPS scheme in 2004 to provide pensions to government employees. Now, any individual above 18 years can invest in the scheme. Regular contributions to the NPS account allow you to build a significant corpus and gain financial independence for your post-retirement years. However, it's crucial to understand what is Tier 1 and Tier 2 in NPS. You may use these two types of NPS accounts based on your financial goals and liquidity requirements. Let’s look at the NPS Tier 1 and Tier 2 accounts in detail:

1. Tier 1 NPS Account: Tier 1 is a basic NPS account that any individual above 18 years can open. Every NPS subscriber gets this account by default. This long-term investment account delivers market-linked returns to facilitate retirement planning.
2. Tier 2 NPS Account: NPS Tier 2 is a voluntary account that Tier 1 account holders can open. It is more flexible in terms of withdrawals. However, it offers lower tax benefits than a Tier 1 account.

The Pension Fund Regulatory & Development Authority, or PFRDA, regulates the scheme to ensure compliance and security. When you invest in the account according to your financial convenience, the money grows through accumulating interest. You can withdraw 60% of the corpus in a lump sum upon retirement and invest the remaining 40% in an annuity. Tax benefits of up to Rs. 2 lakh under Sections 80C and 80CCD (1B) are the most attractive benefits of the Tier 1 NPS account.

Employee Provident Fund (EPF)

EPF is another government-backed pension plan regulated by the EPFO (Employees' Provident Fund Organisation). It is accessible to salaried employees. You must contribute 10-12% of your basic salary to the account, and your employer must match the same. Upon retirement, you receive the accumulated corpus with interest as a lump sum. A loan facility is also available for EPF account holders against their corpus.

Public Provident Fund (PPF)

PPF is another pension plan with investor-friendly features. It is a long-term savings plan and has a lock-in period of 15 years. Upon maturity, you can extend the fund in multiple five year blocks. You can deposit a lump sum or create up to twelve instalments in a year. The minimum deposit amount is Rs. 500, and the maximum is Rs. 1.5 Lakh.

Since it is a government-backed plan, it is a safe investment option for individuals with a low-risk appetite. The major attraction of PPF is its EEE status, which means the principal, interest, and maturity proceeds are tax-free. The plan also offers a loan facility from the 3^rd to 6^th year of opening the PPF account.

Annuity Plans

If you want guaranteed returns after retirement, opt for an annuity plan with a financial safety net for your family. Choose from a single premium annuity, joint annuity or annuity with returns based on your individual preferences. These plans also offer the flexibility of paying a single or a regular premium. You can choose to receive monthly, quarterly, half-yearly, or yearly income. The premium payments offer tax benefits under 80C, but the annuity income is taxable.

There are two types of annuity plans:

1. Deferred Annuity: A deferred annuity plan lets you accumulate a corpus through a single lump sum or regular premium payments. The pension starts upon the completion of the policy tenure.
2. Immediate Annuity: In an immediate annuity plan, you start receiving the pension immediately after investing a lump sum amount. If the investor dies, the nominee gets the pension for the remaining policy tenure.

Pension Plans with Life Cover

Most pension plans offer life insurance coverage. If the policyholder dies, the beneficiary receives the entitled benefits. The primary purpose of the plan is to provide a pension to the subscriber. Moreover, the insurance cover offers financial safety to the investor's beneficiary in case of their early demise.

Steps to Choose the Best Pension Plan?

Follow these steps to choose the best pension plan:

3. Evaluate your financial goals, retirement age, and money you wish to receive post-retirement. Estimate the monthly expenses after retirement and find the total amount you will need in the future. Accordingly, you must decide how much you must invest to achieve your financial goals. Begin with a small amount and increase the investment as your income grows.
4. Research various pension plans, check their benefits, and shortlist some that meet your goals.
5. Read the terms and conditions carefully to understand the plan and start investing.

Retirement planning is essential for financial well-being during the golden years. You can choose any of these options to invest for your retirement from ICICI Bank. Remember, you will depend on your savings and investments during your post-retirement years to lead a comfortable life. So, choose your pension plan wisely and make arrangements to spend your retirement life peacefully. With technological advancements, finding information and investing in pension plans is a task of minutes. For instance, if you want to know what is Tier 1 and Tier 2 in NPS, you can quickly learn about them online and start investing almost immediately.