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What is a pension plan and how does it work

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What is a pension plan and how does it work

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  1. What is a pension plan and how does it work

  2. Retirement is most popularly associated with relaxing, playing with your grandkids and visiting all the places you’ve always wanted to visit but were not able to do so because of your busy office life. But with the rising cost of living and always increasing inflation, these dreams stand a chance to be derailed. However, there ways to protect these aspirations and one of them is opting for a pension plans.

  3. Taking one today would mean a retirement full of joyful moments and will guarantee that you live with pride post your retirement. This article will give you a basic understanding as to what a pension plan is and how it works. 

  4. Pension policy explained in short

  5. To put it simple, a pension plan is a life insurance policy clubbed with an investment plan that ensures your financial security post your retirement or the financial well being of your loved ones in case of your death.

  6. Phases of a pension plan

  7. Before we understand how pension plans work, we must first understand the two phases that underline most plans in the market today. These phases are known as the accumulation phase or the withdrawal phase which is also known as the distribution phase. The accumulation phase refers to that period of your wherein you accumulate funds toward your plan. So when you’re paying your premiums toward the policy, you are in the accumulation phase. Then on retirement or when the policy reaches maturity you begin the withdrawal or distribution phase wherein you start receiving funds out of the accumulated wealth.

  8. How does it work?

  9. A pension plan begins with the accumulation phase. Under this phase you continue to pay premiums for a specified tenure. These premiums will be aptly invested and used to build a corpus. It’s worth noting that these premiums are also eligible for tax incentive under section 80CCC of the Indian Income Tax Act, 1961. After the accumulation period the distribution phase begins, which begins once you retire. Post this point, you’re entitled to receive one third of the accumulated amount as a maturity benefit. Again, under section 10D of the Indian Income Tax Act, 1961, this withdrawal is tax free.

  10. The other two third of your corpus is then utilized to take out an annuity plan which will be source of your income for the rest of your life. But in case the policyholder dies before the maturity of the plan, then the beneficiary stand to receive the complete sum assured with profits earned from the invested market. Again this payout will be tax free.

  11. Premium payment options

  12. Most insurance companies offer regular, limited and single premium payment options. Under the regular premium payment option, you have to pay monthly, quarterly, half yearly or yearly premiums until the maturity of your policy. With limited too you pay these regular payments but only for a limited number of years, say 5, 10 or 15 years, post which you are not required to pay any further amounts. And as the name suggest, single premium payment means you pay only one lump-sum amount upfront, after which you will have to pay no further premiums toward your policy.

  13. So as you can see, pension plans provide you a means to live in abundance and enjoy a care-free life post retirement. It’s the perfect way to take charge of your retirement, speak to your life insurance about pension plans today!

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