Types of retirement account: Which one is best for you?

Consider opting for one of these retirement plans to ensure a comfortable retired life.

Types of retirement account: Which one is best for you?

Retirement is a major event that marks your transition to the next stage of your life. In addition to taking care of your basic necessities, long-term financial planning plays an important role in ensuring that you can live the sunset phase of your life in comfort and with dignity. Different types of retirement plans are available that can help create investments and ensure a stress-free retired life. 

Retirement plans can be classified into three broad categories: 

1. Employment-based pension plans

Employers have designed and put into operation certain plans for the benefit of their employees by ensuring income in the form of a lump sum or annuity post-retirement. The plans are designed in association with an insurance company. Employees can choose to opt in or opt out of these plans, which are offered as a part of their CTC (cost-to-company). 

There are different types of employment-based retirement plans that one can consider.

Defined contribution plans: Defined contribution plans involve contribution from both employer and employee towards a pension plan. While the contributions are defined, returns from the contributions are not. These funds are low risk to the employer and the administration costs are quite low.

Defined benefit plans: If opting for a defined benefit plan, employees are guaranteed a fixed payout for life post retirement. The benefits receivable by each employee are calculated based on factors like the number of years of service with the employer and their last salary drawn. The employer bears the responsibility of ensuring there are enough funds to pay employees covered under the scope of the plan. 

Hybrid plans: These are a combination of defined contribution plans and defined benefit plans. 

Related: Five must-have investment instruments for retirement planning

2. Insurance-based retirement plans

Opting for an insurance-based retirement plan in addition to an employer-based plan is a good idea. It can help maintain continuity in the process of wealth creation, even in situations where the employer-employee relationship ceases to exist. Insurance-based retirement plans can be opted for directly by an individual without an employer’s contribution through an insurance company. These plans help in building wealth and can substitute for a regular income after retirement. Returns from annuity plans are taxable, but premiums paid towards annuity plans are exempted from taxation under the Income Tax Act, 1961. 

The following are different types of insurance-based retirement plans that one can consider.

Deferred annuity plans: In this type, the annuity or payout receivable is deferred until a future date. You can purchase the policy through a single lump sum payment or premiums throughout the policy tenure. The capital amount invested in the plan cannot be withdrawn under any circumstances. The pension is provided post the completion of the tenure. After completion of the policy term, you are permitted to withdraw the corpus. Note that only 33 percent of the corpus is tax-exempt. 
Immediate annuity plans: One of the benefits of opting for immediate annuity plans is that you can commence receiving pension soon after depositing a lump sum towards the annuity plan. You can deposit a lump sum amount based on the estimated pension you would like to receive. The current market return on these plans is approximately 5 percent. The capital invested in the plan cannot be withdrawn under any circumstances. 
Pension plans without cover: Under the terms and conditions of these plans, nominees are entitled to receive a lump sum amount accumulated up to the date of death of the policyholder, to compensate for loss of income. These plans are not accompanied by a life cover.  
Pension plans with cover: Under this plan, nominees are entitled to receive the corpus accumulated to compensate for the loss of income on the death of the policyholder. A life cover is included as a part of the plan. However, since the focus of this plan is on creating a large corpus, the life cover amount received is not very high. 

Related: Why is life insurance one of the most preferred investments with benefits

3. Government retirement plans

Retirement plans from the government are designed and put into operation to help people generate income after they retire. There are two types of government-based retirement plans that one can consider. 

National Pension Scheme: NPS was introduced by the government to secure the interest of employees after their retirement. The scheme, which was introduced solely for government employees, was later opened to all. NPS allows applicants to contribute from the age of 18 and invests the money in equity or debt as per their choice. Upon retirement, 60 percent of the corpus can be withdrawn and the remaining 40 percent is used to purchase an annuity plan that ensures a regular stream of income. 
Public Provident Fund: PPF is a tax-saving and investment tool that is perfect for investors with a low appetite for risk as returns are guaranteed by the Central Government. Investors are required to contribute a sum ranging from Rs 500 to Rs 1,00,000 a year towards building a corpus. 

Related: Alternative sources of income if you don’t have a pension

Developing a framework of your expectations is the primary step towards achieving your goals. So educate yourself and stay committed towards your goal. Happy investing! Retirement planning for pros: Read about National Pension Scheme in detail

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