Most of us are determined to secure our future. This explains our proclivity to save or invest in pension plans that guarantee a fixed income every month after we retire. One may choose to invest in pension funds sold by private and public insurance companies in India. An increasing number of people are now applying for government-induced pension plans, be it online or offline.

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Why should you invest in a pension plan?

Investing in a pension plan is important considering the need to maintain a continuous flow of income, thus, enabling an inhibited lifestyle. Raj Khosla, founder and managing director, MyMoneyMantra.com, says, "A pension plan offers two-forked retirement protection by way of building a corpus and ensuring an annuity. Unless you are financially savvy and confident to directly manage investments in equity and debt, investing in a pension plan is strongly recommended for retirement planning."

Kinds of pension plans

Also known as annuity plans, these plans are an important component of your investment portfolio. Depending on the value of your existing assets and your ability to meet contingent liabilities in the future, one may opt for any of the following types of pension plans:

Immediate Annuity Plan: One has to invest a lumpsum amount at one go to initiate the regular income or payout for the rest of their lives. Naval Goel, CEO & founder, PolicyX.com, says, "Yes, buying an Immediate Annuity Plan helps if you have a lumpsum amount with you, and need it at regular intervals to meet your expenses especially after retirement. An immediate annuity is ideal for someone approaching retirement soon." Depending on one's requirement and potential expenses involved, one may opt for a monthly, quarterly, half-yearly or annual payout.

Deferred Annuity Plan: This kind of pension plan allows you to save your earnings over a period and then receiving income as regular payouts after retirement for a specific number of years. Prior to the beginning of the pension phase, the policyholder can withdraw one-third of the earnings accumulated while the remaining can be used to buy an annuity product. However, buying this kind of plan has its own drawbacks. Anjali Malhotra, chief customer, marketing, digital and IT officer, Aviva Life Insurance, says, "Deferred Annuity Plan without return of premium has a major tax disadvantage as the principal amount, which is invested out of tax paid income, is again taxed as per the slab rates. In other countries, there is a clear provision to exclude principal. It is high time that a change in the Income Tax Act is introduced to this effect so that only accretion is taxed."

Those opting for deferred annuity plans may choose to invest in

Traditional Retirement Plans: Risk-free government plans or fixed pension plans sold by insurance companies are some traditional pension plans that one may opt for. C S Sudheer, founder and CEO, Suvision Holdings, says, "Insurance-based pension plans or annuity plans where the pension is paid to the annuitant until death or death of the annuitant and then to the wife until her death or certain fixed time period. Pension plans with or without life cover, single premium pension plans and unit-linked pension plans are quite popular."

Unit-Linked Pension Plans: These are pension plans, albeit with a difference. Linked to market movement, these pension plans offer better returns than their traditional counterparts. Depending on risk appetite, policyholders buying these plans can choose between the allocation of their investments between equity and debt. Suresh Sadagopan, founder, Ladder7 Financial Advisories, says, "ULIP pension plans have the potential to offer better returns and a higher corpus at maturity, but it comes with a higher risk. In the initial stages, one can allocate more equity, which can come down to low levels when a person retires thereby managing risk. ULIP pension plans also have become low cost & hence good for clients as compared to traditional pension plans."

Tax exemptions and benefits of pension plans

Depending on the kind of pension plan chosen, one may avail tax benefits. Vineet Patawari, co-founder, stock analytic app StockEdge and financial market learning portal Elearnmarkets.com, says, "Section 80CCC is part of Section 80C category which allows tax deduction up to Rs 1.5 lakh annually for investments. Section 80CCC deals with tax deductions for the purchase of any annuity plan offered by LIC or other insurance companies. The withdrawal on surrender or on retirement is treated as income and taxed accordingly. Whereas Section 80CCD, also related to pension, deals with contributions to the National Pension Scheme (NPS). An additional tax benefit of Rs 50,000 is possible for investments made under the NPS. On maturity, about 60% of the total corpus can be withdrawn as a lump sum and it's exempted from tax. The remaining 40% will be in the form of an annuity and is taxable."