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Every individual hopes for a relaxed, independent and secured retired life. A suitable pension plan at the right time not onlyleads to a hassle-free future but is also an assured source of tax-free income.

What is a Pension Plan?

A Pension Plan is a type of retirement plan, wherein an individual saves money while working and builds up a fund that can be used for his expenses post retirement. These are offered by insurance companies thatalso invest the money so that the investor can beat the inflation and make a real income.

Why should one invest in a Pension Plan?

A pension plan is a vital investment, considering the rising cost of living (inflation). A carefully planned and periodically reviewed investment plan can prepare you to respectfully manage your expenses and maintain your lifestyle, as you get older.

Types of Pension Plans

Pension plans vary in terms of their structure and benefits. The two major types of pension plans are

  • Defined benefit plan
  • Defined contribution plan

How does it work?

In case of aDefined Benefit Plan, the insured is entitled to a specified amount of pension benefit based on factors like years of service left and present earnings.

In Defined ContributionPlan or money purchase plan, a specified amount is contributed regularly by the investor each month. This is deposited in an investment account. These contributions along with interest can be availed as pension (postretirement).

Tips to invest in a pension plan

  • The pension amount required depends on the future financial plans/ commitmentsone expects to fulfill. Expenses for travel,health etc.influence the total pension amount that could be sufficient for you after retirement.
  • The premium that one can afford depends on the current income and savings that one canhave.
  • These savings are your primary source ofincome post-retirement. Hence this corpus should not be withdrawn unless necessary.
  • Examine the various alternatives that insurance companies provide while selecting a plan.
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