Pension Planning: 5 important points to factor in before selecting a retirement plan

Rapidly changing social realities and the rising cost of living have made retirement planning a must for all individuals. While in past, when joint families existed, older generations were looked after by the younger earning family members. However, small and nuclear families are becoming the norm now as the young generation continues to move cities in pursuit of better income opportunities. It is now, therefore, become important for every individual to have an independent retirement income.

Experts say that with proper planning and investments during active earning years, one can accumulate enough for a peaceful retirement life without financial woes. However, not many individuals seem to have taken retirement planning seriously.

A recent study revealed that 1 in 4 people have not even thought of retirement while 50 per cent of the respondents believed their savings will exhaust within 10 years. Moreover, for most of the respondents, saving or investing for retirement was not among the top financial goals.

“Given the ever-growing inflation, investing in these plans has become paramount and thus, even if there is considerable savings in a bank account, a pension plan will still be a prerequisite to sustaining the retirement,” Sundara Rajan TK, Partner at DVS Advisors LLP, told FE Online.

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There are multiple pension plans, also referred to as retirement plans, in which individuals can invest. The prime objective behind these plans is to ensure a regular flow of income post-retirement.

An investor may choose any retirement pension plan. However, experts suggest before selecting a pension plan, individuals should keep in mind several factors like positive return post inflation, tax implications and more. Following are five key points an individual should factor in before selecting a retirement plan.

1. Positive post-inflation returns

While investing or saving for retirement, it is important to factor in inflation. Such investments should guarantee a positive post-inflation return.

“The long-term investment must guarantee a positive return post inflation. For example, if the rate of inflation is 6% p.a., the value of Rs. 100 today will be equal to Rs. 94 after one year. Thus, if the investment in the pension fund gives a return of less than or equal to 6%, it will not be a viable option for planning the retirement, said Rajan.

2. Don’t seek more risks

Retirement planning experts say that investors should not seek more risks at the time of retirement. It is important to stick to guaranteed return on investments and further, the investments should reflect the low-risk corpus to fight the increasing market volatility.

3. Ensure adequate pension

Rajan said that while choosing a retirement pension plan, one must ensure to receive adequate pension income post-retirement, which should be sufficient to meet the expenses as well as a backup for emergency requirements

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4. Factor in the amount of annuity offered

Retirement pension plans differ in terms of annuity offered. While some plans may provide the annuity for only a certain period post-retirement, others may ensure regular pay for the whole life.

“Another pertinent consideration is the amount of annuity offered. There are various retirement pension plans which differ in terms of annuity offered. Some plans may provide annuity payment only for a certain period post-retirement and some may ensure the regular pay-out till the death of the person. There are plans which assure the annuity to the nominees even after the demise of the assured person,” said Rajan.

5. Tax implications

Taxes are probably the most important factor to consider while choosing a retirement plan. The taxation aspect shall differ based on the type of pension plans and the risk appetite of the investor.