Pension Plans

help plan for retirement and offer the security of insurance.

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How to Get Good Returns and Tax Exemption in a Pension Plan

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While people are actively earning they hardly realize that they would at some point in time enter the retirement age when they may not have any employment. The only source of income for them then would be the savings they have accumulated over their life time. Whether or not the savings would be enough to lead a comfortable retirement life would depend on how much you have been able to save regularly, how long you have been able to save, and how effectively and smartly have these savings been reinvested.

Options available

While planning for retirement you can choose from various options which include provident fund, Pension policies, new pension scheme and unit linked pension plan. All the savings that you make for retirement in either of these schemes would be exempt from tax under section 80C. So if you make an annual contribution of INR 30,000 towards any of these schemes you can save upto INR 9000 annually in form of tax benefits. The amount of savings available to an individual in form of tax exemption depends upon which tax rate his income is taxed at. Thus, retirement savings help you lower your tax liability and earn an enhanced return on your investment.

The amount of return that you would earn on your retirement savings would depend on the scheme you choose to invest. All pension plans including the new pension scheme guarantee that while you retire you would receive a positive return on your investment. The provident fund generally guarantees an annual return between 8 to 9 percent on your investment. Unlike pension funds wherein only one third of the Maturity benefit is tax exempt, in case of a PPF the entire maturity proceeds is tax free. The rate of return on a provident fund is assessed by the Government of India on a regular basis based on other benchmark investment options.

If you choose to invest in the National Pension Scheme there are various options for you to choose from. These options allow you to define how aggressively or conservatively you would like to invest your retirement savings. You can define the desired mix between debt and equity based on your personal Risk profile. If you do not want to get into these intricacies the National Pension Scheme will choose the right mix for you depending upon your age and would invest the savings accordingly. The fund management charges to be paid by an individual in case of an NPS are lower than other pension plans.

If you choose a traditional pension Policy it will conservatively invest your savings in debt instruments like government securities, government bonds etc. Here safety is of utmost concern and hence return generated is usually in single digits. This is generally lower than investing in a National Pension Scheme which are less conservative and in my view more balanced in their investment approach. If you intend to be more aggressive with your retirement investments you can choose to invest in a unit linked pension plan which will allow you to invest upto 100 percent of your retirement savings in equity. A ULPP also permits you to switch your investment from equity to debt and vice versa depending upon your perception of risk-reward profile.