It is best to start investing in pension funds as soon as possible. The returns you will receive from early investing will be significantly high due to the power of compounding. It is possible to start investing in small amounts and then gradually increase the amount.
Types of Pension Funds in India
Pension funds are retirement plans which require a person to invest a portion of their income regularly. Their primary goal is to provide an investor with a steady income flow after they retire. There are two stages of investment in pension plans- accumulation and vesting. Investing in pension funds is crucial to counteract losses from rising inflation.
In this article, we will discuss the types of pension funds available in India. Read further to know more.
List of the Different Types of Pension Funds
Given is a list of various types of pension funds available in India.
- National Pension Scheme (NPS): The Government of India launched a pension plan known as the National Pension Scheme (NPS) in 2004. Initially meant for government employees, it became available for non-government employees as well. NPS gives you a choice to invest regularly in equity and debt funds based on your risk appetite. Individuals can withdraw up to 60% of their accumulated corpus at retirement, while the rest is used to purchase an annuity, which is a retirement plan that provides regular income. The Pension Fund Regulatory and Development Authority (PFRDA) regulates NPS in India. One must invest in this scheme until 60 years of age and invest a minimum of ₹1,000 in a year. Returns from this investment depend entirely upon how the funds you have chosen perform.
- Public Provident Fund (PPF): Public Provident Fund (PPF) is a popular type of pension fund in India. It is a long-term investment plan with a minimum tenure of 15 years. PPF offers attractive rates of interest, which investors can use to their benefit through the power of compounding. The government sets the interest rate on PPFs during every financial quarter. This is based on the performance of government securities. Since they are not linked to market performance, they are considered a very safe investment option. The maximum investment cap on PPF is ₹1.5 lakhs per year. An individual can pay this amount in a lump sum or via 12 instalments throughout a year. PPF investments are eligible for multiple tax benefits, including tax deductions under Section 80C and tax exemption on interest and maturity.
- Employees Provident Fund (EPF): Employees Provident Fund (EPF) is another type of pension fund which is supported by the Government of India. The Employees Provident Fund Organisation (EPFO) regulates EPF in India, and they decide the interest rate on investment. EPF is available to all salaried employees. Both the employer and the employee have to contribute equally towards the fund. The amount is generally deducted from the employee’s salary each month. The contribution required is usually 10 – 12% of the employee’s basic salary, and the employer must match that amount. Upon retirement, the employee receives the accumulated funds along with accrued interests.
- Mutual Fund Schemes for Retirement: There are numerous mutual fund schemes out there that are suitable for retirement planning. They come in multiple variants, with some focusing on equities and others on debt instruments. There are also hybrid schemes that invest in a mix of both equities and debt. These are one of the best pension funds as they allow you to get inflation-beating returns over time and, thus, grow a large retirement corpus. Moreover, you can use a Systematic Investment Plan (SIP) to invest small amounts regularly. The lock-in period varies by the scheme.
- Annuity Pension Funds with Life Insurance Coverage: Annuity pension plans with life coverage provide life insurance along with a periodic income. In case of unforeseen circumstances, these insurance policies provide the policyholder’s family with a lump sum payment. The main goal of such plans is to provide the policyholder with a sustainable pension. Life insurance additionally provides the dependants of the policyholder with financial security. Hence, a part of the investment goes towards risk coverage.
There are 4 types of annuity plans which are:
- Deferred Annuity: You can amass a corpus amount for your retirement via deferred annuity plans. They require you to make a single premium payment or regular premium payment throughout the policy’s tenure. Once the tenure is over, you will start receiving the pension. The corpus is locked till the end of the payment tenure and cannot be withdrawn. This type of pension fund is suitable for salaried employees and those with a retirement date in the far future. One-third of the accumulated amount is tax-free, while the rest is liable to taxation.
- Immediate Annuity: Unlike deferred annuity plans, one does not have to wait till the end of the tenure to start receiving a regular pension. Immediate annuity plans start giving the pension immediately. An investor is required to pay a lump sum amount and receives an annuity based on the amount invested. The premium paid is exempt from taxation based on the Income Tax Act 1961.
- Fixed Annuity: This is a lower risk-associated option that guarantees fixed returns on your investment during a fixed period. The returns from fixed annuity is not associated with market sentiments which serves as a root cause behind your stable returns. However, the downside of this type of annuity fund is that the returns remain fixed and hence it does not increase at par with inflation.
- Variable Annuity: The return from these funds is typically dependent on the money market fluctuation. Hence, this can be a good plan for investment to maximise your returns. However, you should note that these types of annuities are extremely volatile and are generally associated with risks. So, you should think twice before investing in these plans.
It is natural that after retirement, one has to rely on their past savings and investments. This is what makes pension funds all the more vital. They are a huge help in supporting you financially after retirement.
Now that you are aware about the different types of pension funds available in India, you can take a call accordingly based on your requirement.
FAQs about Types of Pension Funds in India
Yes, under Section 80C of the Income Tax Act 1961, you can get tax deductions for availing a new pension fund or renewing an existing one. Their maturity amount is free of tax, while the annuity is subject to taxation.
The amount that people should invest in a pension fund entirely depends upon factors such as their lifestyle, financial dependents, income levels, and health conditions, amongst many more. One can use various pension plan calculators available online to estimate the right amount to invest.
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