4 Factors to Consider Before Investing in a Pension Plan in India

• Eastern Eye Staff
• 23 June, 2021

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By: Eastern Eye Staff

Planning for one’s retirement is crucial for ensuring a financially independent life post-retirement. Even though most people working in the corporate sector, or government jobs tend to have a pension fund set up by their employer, it’s often not enough to match future inflation rates, considering the fact that inflation has been on a constant upswing since many years now, and is only expected to rise further. Therefore, proper financial planning is the key to making sure that you are able to meet your financial goals for the future and don’t have to face a crisis when the time comes to just lay back and enjoy life after decades of hard work at your job.

There are multiple ways of building a post-retirement corpus such as investing in a pension plan, opening a fixed deposit account, or investing in market-linked plans such as ULIPs to generate good returns over the course of the investment. No matter which way you choose to go, proper planning and timely investment is crucial for things to work in your favor. First, let’s take a look at one of the most popular and traditional investment options that people are familiar with—fixed deposit.

What is a Fixed Deposit?

A fixed deposit is an account that you create with a bank and invest a lumpsum amount for a specified period to generate funds. This is often based on a fixed interest rate and gives you stable returns. So, a lot of people consider it to be one of the safest investment options out there. However, even then it does not give you the kind of returns a pension plan can give.

Most people know what is fixed deposit but in order to build a sound financial future, there are other financial instruments that you should know about. After all, there is nothing like ‘too much financial security’

What is a Pension Plan?

A pension plan is a fund that you invest in over the course of your working life to create a post-retirement corpus. It can be of two types:

1. Fund Created by your Employer: Your employer creates a pension fund and is responsible for investing much of the amount that goes into this fund; thereby, creating a pension fund that you can access after a specified lock-in period has been met.
2. Self-Created Fund: You create this fund yourself by investing across various investment options to generate a retirement corpus for yourself.  

It’s best to always create a separate pension fund for yourself even if your employer has one for you to further strengthen your post-retirement corpus. You have multiple options when it comes to investing. Let’s look at a few of the best pension plans in India:

• Deferred Annuity: The way this plan works is by making a single lumpsum investment or paying daily premiums to build up a corpus. This allows a person to build up a significant post-retirement fund once the plan has matured.
• Immediate Annuity: This is for people who either didn’t plan their post-retirement corpus, or for people who want to generate additional funds for a post-retirement life apart from their regular investments. For single lumpsum payment, a person starts receiving immediate annuity. Moreover, you get to choose the amount and the plan you want to invest in since there are multiple options available.
• Annuity Certain: This is one of the most popular options. By investing in such a plan, a person gets to collect set annuity for a specified period, and upon death of the policyholder, the contributions made are paid to the family members.
• National Pension Scheme: This is a government backed pension fund that gives you a lumpsum amount apart from regular payouts post maturity of the plan.

Now that we have looked at a few of the most popular options that are available to you for investment. Let’s look at the things that you need to consider before you decide to invest in a pension plan in India.

   1.Always Keep Your Future Financial Goals in Mind

Don’t just invest without giving a thought to your future investment goals. It’s best to go through each type of plan, and then figure out the best way forward to meet future inflation rates, and invest in a way that you are able to meet all your financial goals.

     2. Getting a Lumpsum Payment Vs Regular Income

Pension plans give you the option of getting a one-time lumpsum amount, regular payouts, or a combination of both. It’s important to choose a plan that gives you exactly what you need for a comfortable retired life.

    3. Keep Your Risk Appetite in Mind

Everyone has a different risk appetite. You need to keep yours in mind before investing. Some plans give you higher returns but are higher risk, while others are lower risk but give stable returns over the lifetime of the investment. It’s best to consider your risk appetite before investing so that you can make the best of your pension fund.

    4.Pension Fund Provider

Never invest in a plan just because it sounds lucrative without checking the reputation of the pension fund provider. As a word of caution, always invest in plans rolled out by reputed pension fund providers so that you can get stable and guaranteed results, considering the fact that the money you are investing is to build a post-retirement corpus.