Pension Fund - Check Types of Pension Funds In India 2023

The onset of retirement brings a new stage in a person's life. It allows plenty of time to spend with loved ones and start checking off items on a lifelong bucket list. It also means that one has to plan for their finances in the absence of a regular monthly paycheck. They must then rely entirely on their savings and investments. Pension funds can therefore be a great investment choice. They ensure a consistent flow of income after retirement, from financing your daily necessities to taking care of medical crises and other obligations.

What is a Pension Fund?

Pension funds, usually referred to as retirement funds, are a type of savings programme in which an investor deposits a small amount of their pay into a specified savings plan. By consistently contributing a fixed amount to their pension fund, the investor would gradually amass a sizeable sum. This capital in their pension fund is then used to pay a pension after the employee has retired. 

Typically, pension plans have two stages:

• Accumulation stage: Involves regular payments of a certain amount till retirement.
• Vesting stage: After retirement, you receive a consistent income stream for the rest of your life.

Types of Pension Funds in India 2023

• National Pension System (NPS)

In India, there is a government-sponsored pension programme called the National Pension System. Employees in the public, private, and unorganized sectors can use it. NPS is designed to promote financial inclusion in the years following retirement. The Pension Fund Regulatory and Development Authority, PFRDA oversees its regulation. 

NPS uses Tier-I and Tier-II accounts. With a few exceptions, the tier-I fixed account is not subject to any deductions, while the tier-II account serves as a savings account from which funds may be occasionally withdrawn. 

• Atal Pension Yojana (APY)

A government-backed pension programme aimed at employees in the unorganized sector is called Atal Pension Yojana. Pension Fund Regulatory and Development Authority, PFRDA is in charge of managing it. 

This plan is available to anyone with a bank savings account between the ages of 18 and 40. It is a deferred pension plan with five plans or options that promise a monthly pension of Rs 1,000, Rs 2,000, Rs 3,000, Rs 4,000, and Rs 5,000 by the time the member turns 60.

• Public Provident Fund

The Public Provident Fund, also usually known as PPF, is a long-term retirement savings plan with a 15-year maturity period. Due to the lengthy tenure, compounding has a considerable impact on your PPF investments.

A maximum of Rs. 1.5 lakh can be put into a PPF account each year. Investment in this plan can be made together or over the course of 12 monthly payments spaced out over a year.  Each quarter, the government will set the interest rate for PPF.

• Employees' Provident Fund (EPF)

Employees' Provident Fund is an Indian social security programme for workers. It was started by the government and is run by the EPFO, or Employees' Provident Fund Organization. Monthly contributions are made to the EPF account by both employers and employees, which is intended to give a lump sum payment at retirement. Employer contributions are equal to 12 percent of base salaries plus dearness and retention allowances.

• Employees' Pension Scheme (EPS)

Employees' Provident Fund Organization (EPFO) offers the Employees' Pension Scheme, a social security programme. The plan provides for organized sector employees to receive a pension when they reach the age of 58 and retire.

It offers pension benefits to qualifying workers who are EPF members. The employee's average monthly pay and number of years of service also factor into the pension amount. A total of 12% of the employee's wage is contributed by both the company and the employee to the EPF.

• Superannuation Fund

Superannuation funds are retirement plans sponsored by employers. It is an organizational pension plan developed by a business for the advantage of its staff. It is referred to as a firm pension plan, in other words.

For the benefit of the employee, the employer must pay a maximum of 15% of the salary to superannuation funds, which are then overseen by a qualified fund manager.

It's important to keep in mind that India's pension fund rules and services may change over time. For the most recent information about pension funds in India in 2023, it is advisable to contact the Pension Fund Regulatory and Development Authority (PFRDA) or a financial advisor.

Benefits of Investing in Pension Funds 

The advantages of a pension plan are listed below:

Flexibility: Indian pension funds provide a range of choices for investments, contribution levels, and withdrawal methods. This enables you to customize your financial planning for retirement.

Pension Fund Management: Qualified fund managers with experience in investment management manage your funds.

Payroll Deduction: The required investment for the retirement plan is taken directly out of the employee's pay. As a result, managing employee finances is made simpler. They are not required to manually move money from one account to another. 

Duration of Accumulation: People have the option of making monthly or one-time lump sum investments. People might choose to make regular installments or a single lump sum investment.

A Steady Income: A pension fund ensures that the investor can live a financially independent life, post-retirement and enjoy their golden years. 

Liquidity: Low liquidity is a problem with pension funds. However, in the event of emergencies, there are strategies that permit partial withdrawal before the end of the term. 

Payment period: The investor receives the pension throughout this time. Investors can frequently take money out of pension funds while they are still in the accumulation phase. The payment period is typically kept apart from the accumulation period.

Tax advantages: Tax exemptions are available under the Income Tax Act for purchasing and maintaining a pension plan. 

Independent of Inflation: Pension funds provide returns that are adjusted for inflation, another advantage of investing in them.

Insurance cover: Many pension funds provide investors with a lump sum payout when they reach retirement age or in the event of their death. This suggests that you also receive the advantage of insurance coverage from the pension fund.

In Conclusion

Pension plans are an excellent method to protect your financial future after retirement. In India, many pension funds have different benefits and investment criteria. There is no denying that pension plans are a very safe type of investment. Choosing the right pension fund to invest in is essential to achieving all of your financial goals for the post-retirement years.

FAQs

• How can a pension fund be created?

Pension funds are typically established by the company you work for. As soon as you start working for a given organization, a pension fund is automatically established for you. However, if you work independently or your company does not provide such retirement plans, you can invest in SIPs or even public pension plans. Many people choose these kinds of plans because they adapt for inflation. 

• What is an annuity plan?

An annuity is a contract in which an insurer pays you a set sum on a regular basis over an extended period of time, typically a lifetime. Annuities are designed to deliver a consistent income stream after retirement.

It is a strategy for protecting your retirement years from financial risk, ensuring that your savings won't be jeopardized and that you won't have to take on debt to maintain your standard of living.

• Are pension funds taxed?

Taxpayers can claim deductions for contributions up to Rs. 1.5 lakh under Section 80CCC of the Income Tax Act. Included in this is the sum used to buy or renew a pension plan.

Importantly, section 80CCC permits both resident and non-resident Indians to claim deductions.

• What does a Pension Fund invest in?

To minimize risk and maximize returns, the money is frequently placed in a diverse portfolio that consists of stocks, bonds, real estate, and other assets. Pension payments for retired people are made using the profits from these investments.

• What happens with the Superannuation fund if an individual leaves a company?

If a worker leaves one firm and joins another, he may transfer his superannuation fund to the new organization if it accepts superannuation funds. In India, superannuation withdrawal upon resignation is only possible if the new employer does not offer this option. In this situation, the employee has two options: remove the money while paying the relevant taxes, or keep the money in the fund until retirement.

• What distinguishes Pension Schemes from Pension Funds?

Although related, pension funds and pension schemes have different meanings:

Pension Funds: Pension Funds refer to money that has been built up through time by payments from employers, employees, or both in order to see through an individual's retirement income or benefits.

Pension Schemes: A pension scheme is a more extensive and all-encompassing structure that controls the regulations, obligations, and benefits related to pension funds, contribution policies, eligibility standards, and payout procedures.