Define Retirement Plan and Types of Retirement Plans

Is Retirement Plan Essential?

There are several reasons for the popularity of Retirement Plans in India, these are as follows:-

Socio - Cultural Change

The trend of joint family system is slowly deteriorating and the nuclear family system is being followed especially in urban areas in India due to various reasons like employment, income, independency and reluctance etc. Due to socio-cultural changes, the retired persons are increasingly under pressure to arrange their own income after retirement. Now-a-days, the retired/old age persons also like to be more financially independent.

Increase in Cost of Living

At present, the cost of living is very high due to various economic reasons like inflation, food scarcity, population etc. The medical service is very expensive and causes heavy financial burden to the old age persons as the coverage of medical insurance is limited besides, the process of medical insurance claim being cumbersome. Therefore, the old age persons are increasingly looking at creating a sufficient and reasonable post-retirement income for the bare survival after retirement.

Longer span of life

The life span of human being has increased due to advanced medical facilities. Hence, a strong financial support is required to the retired persons due to the longevity.

Types of Retirement Plans

There are various retirement plans and schemes in India, both in the private and public sectors such as:-

Life Annuity Plan

Life annuity plan guarantees a person a specific amount of income until he survives. After the person’s death, the originally invested amount is refunded to his nominee or legal heirs, in the absence of any nominee.

Guaranteed Period Annuity

In this plan, the person is guaranteed a specific income for a minimum number of years. If the person dies before that period, the nominees will continue to receive that income till the period is completed. If the person outlives that period, he or she can continue to receive the income till his death.

Annuity Certain

Under this retirement plan, a fixed amount of income is paid for a fixed number of years. The payments will stop at the end of the fixed period, even if the retiree lives beyond this fixed period.

Deferred Annuity

Under this plan, the person first saves from his income to create a corpus fund for a number of years. Thereafter, that fund is used for investing in a specific retirement plan that gives him an assured income till his life time.

Defined Benefit Pension Plan

Under this plan, the pension amount is known and assured, but it is not dependent on any external factor. The investor must contribute some amount periodically either by himself or through his employer or both. This amount is invested which earns some returns. But the investor can get assured sum irrespective of the kind of returns generated by the investment. Their pension amounts were linked to their grade and last drawn salary.

Pros of Defined Benefit Plan

Investor can get peace of mind because they know they will get assured and defined pension amount.

Investors need not worry about monitoring the investments periodically.

Cons of Defined Benefit Pension Plans

There is no disadvantage to the employees whereas this plan is disadvantageous to the employee because they have to ensure that the funds contributed for the pension are invested in such a way that they generate adequate returns to cover future pension of the employee.

If the returns are not enough to pay the pension, the employer has to provide the deficiency either from other sources or contributions of serving employees. (e.g., Government)

Defined Contribution Pension Plan

The amount of contribution towards pension is fixed but the benefit amount is undetermined. This type of plan is called defined contribution pension scheme or plan. Here pension depends on the returns made on the investments. There are multiple options of investments such as equity (high risk and high returns), debt (low risk and moderate returns) or govt. securities (no risk and low returns). The Fund would grow into a large amount at the time of retirement through the investment (of both contribution and returns) over the years. Investors are permitted to withdraw only a part of pension fund as lump-sum. Remaining portion of fund would be invested in annuity and that would provide fixed amount every month.