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Why you need pension plans

Why you need pension plans

You can use insurance policy to enjoy a comfortable retired life, or even bequeath an estate to the individuals or institutions you like.

You buy insurance because you don’t want your family to suffer financially in the unexpected event of your death. Which is something we’ve been saying for some time now. But what happens if you survive the term of the policy? And chances are that you will.

NS Kannan, executive director, ICICI Prudential Insurance, says: “With advancements in health care and increasing longevity, more and more people will be living a fairly long retired life.” Which means that your retirement savings will have to stretch for longer than you anticipated.

Retirement planning has assumed greater importance over the past few years. Given the lack of social security in the country, these days a large portion of savings goes to fund retirement.

Arghya Kamal Mitra
Arghya Kamal Mitra, 45, Kolkata
Since I am self-employed I need to fend for my future. Unlike the salaried who have a provident fund, I have been contributing to a pension plan. This I feel is a great concept and hope it creates a sizeable retirement corpus.

Your networth is part of what you will draw on to pay for your financial goals and your retirement. A strong networth also will help you weather financial crises.

But what if your net worth is perhaps not as strong as you would ideally like it to be?

Will you then be forced to live your sunset years counting your every paise? Not if you take advantage of the several insurance plans, specifically pension plans, that are on offer.

The long-term contributions to pension plans help you create a retirement corpus that benefits from the power of compounding and systematic disciplined investing.

“For me, retirement is a state of mind as well as a financial issue. These days, one is not so much retiring from work as moving into another stage of life,” says filmmaker Arghya Kamal Mitra.

He has been contributing to a pension plan among other financial products.

He has insured himself against all perceivable risks with a pure life cover, a plan for his son to address his education needs, as well as a pension plan that he hopes will see him through retirement.

Smart tips for pension plans

» Start small. Small amounts can make a big difference given enough time, the right kind of investments, and taxfavoured vehicles such as pension plans from insurance companies

» Use automatic deductions from your salary or checking account to deposit in pension schemes

» Roll-over your retirement account money if you change jobs

» Don’t borrow from your retirement plan. Borrowing reduces the account’s earnings. If you fail to pay back the loan, you could end up paying taxes and penalties

Smart tips for whole-life plans

» If used well, the policy provides a cover for the whole life (and not for a fixed term) with a guranteed death benefit

» Once the policy acquires a surrender value after 3 premium paid years; you have the option of taking a loan

» A guaranteed, fixed premium throughout life, allows you to plan your finances 

The trick to ensuring that your pension plan will last out your retirement is to invest aggressively and start that process when you’re still young. “Ideally, if you start early, you have years to overcome the inevitable ups and downs of the market,” says Kannan.

Unfortunately, this is an idea that’s not caught on yet, and young people are still wary about investing for long-term benefits.

Whole-life plans: Once you’ve made arrangements for your retirement, you might want to consider your legacy.

What are you going to leave behind for your dependents and family? Again, look to insurance for an answer. Whole-life plans are designed in such a way that you can plan your estate and bequeath the proceeds to individual nominees, trusts or charities.

This concept is quite popular abroad, but is slowly catching the fancy of Indian philanthropists as well.

You can leave a larger charitable gift by bequeathing the proceeds of tax-exempt life insurance, thanks to tax-sheltered growth and a taxfree payout to the charity.

In short, paying for the retirement you truly desire is ultimately your responsibility and so you must take charge.

 It’s not really such a difficult task. All you have to do is remind yourself that you are truly the architect of your financial future. “Unless you have a goal, you would not know how much to work towards,” says Kannan.

You must make a start on saving for retirement, to say nothing of leaving a fortune behind, so we suggest you make a small start now.