Investing in pension funds can be a good idea for regular returns, especially for those who are planning for their retirement.
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Pension funds are long-term investments that aim to provide a stable income stream in the future. Investing in pension funds can be a good idea for regular returns, especially for those who are planning for their retirement.
There are several advantages of investing in pension funds in India. Firstly, pension funds offer tax benefits under Section 80C of the Income Tax Act, which allows investors to claim a deduction of up to Rs 1.5 lakh on their taxable income.
Secondly, pension funds provide a steady income stream in the form of annuities after retirement, which helps in meeting the regular expenses of retirees. Thirdly, pension funds offer a disciplined approach to saving for retirement, as they require investors to make regular contributions towards the fund.
There are various types of pension funds that investors can consider for investment. Here are some of the most common types of pension funds in India:
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National Pension System
NPS is a government-sponsored pension scheme that is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NPS offers two types of accounts, namely Tier 1 and Tier 2. Tier 1 is a mandatory account for all government employees and is open to other individuals as well. Tier 2 is a voluntary account that allows investors to withdraw their funds at any time.
Atal Pension Yojana
APY is a government-backed pension scheme that aims to provide a social security net to the unorganized sector. Under this scheme, investors can receive a fixed pension amount after the age of 60.
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Insurance Plans
These are pension plans managed by insurance companies which may offer life insurance coverage along with the pension benefit. You can choose to pay either monthly or quarterly. Some companies may even offer you yearly payments towards these plans. Under these plans you pay an amount regularly over a fixed period and enjoy the benefits after retirement.
Post Office Monthly Income Scheme (POMIS)
It is a savings scheme offered by the Indian Post Office. POMIS provides a fixed monthly income for a period of 5 years.
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Senior Citizens’ Savings Scheme (SCSS)
It is a government-backed savings scheme for senior citizens. SCSS offers a fixed interest rate and provides a regular income for a period of 5 years.
Annuity Plans from Mutual Funds
Some mutual funds offer annuity plans that provide regular income to investors. These plans are similar to pension plans and are designed for retirement planning.
Adhil Shetty, CEO, Bankbazaar.com, says, “Annuity plans help provide a stable income in retirement. This is the time when you would have stepped back from an active work life. This is the phase you worked hard for all your life. You put your money to work to ensure you will not be left wanting in your golden years.”
“The pension amount need not be very high. Pension planning assumes you have already taken care of financial responsibilities, like home ownership and your child’s education. The pension needs to sustain your daily income needs to manage your household, health and leisure needs,” Shetty explains.
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Unit Linked Insurance Plan
It is a type of insurance product that combines insurance coverage and investment. Under a ULIP plan, a part of the premium paid by the policyholder is used for life insurance coverage, while the remaining portion is invested in equity, debt or balanced funds based on the policyholder’s choice.
Dilshad Billimoria, Board Member, ARIA, says, “The objective of pension funds is to provide regular income to investors. However, withdrawals of pension funds are taxed as per one’s tax slab and many pension fund managers’ fees are high. Thankfully, there are tax-efficient ways to earn regular income like SWP from mutual funds. NPS is also an effective low-cost tool for retirement accumulation strategies.”
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Investors should carefully evaluate their investment goals, risk tolerance, and investment horizon before choosing a pension fund. Investing in pension funds involves some degree of risk, as the returns are dependent on the performance of the underlying assets. The performance of pension funds can also be affected by market volatility, economic conditions, and other factors. Therefore, it is important to choose a reputable pension fund that has a track record of delivering consistent returns over the long term. It is important to diversify investment portfolios across different asset classes to minimize the risks and maximize the returns.
