Planning ahead

Individual citizens, recasting priorities after the pandemic, seem to be waking up to pensions

The pandemic has recast people’s priorities significantly. Many don’t want the logistic hassles of going back to the workplace, and if they have to, not six days a week.

As much as they have started valuing ‘quality of life’, they are getting cautious with their money, risk appetites having been curbed by the uncertainty. Much thought, and action, has gone into savings rather than investment, or at least into safer investments.

An interesting uptrend is in pensions. Leave alone the government employees who have the National Pension Scheme (NPS) and the corporate employees who have this and other options through their workplace, individual citizens seem to have waking up to pensions. Of course, a significant part of this attraction could be the additional tax savings that NPS gives for contributions up to ₹50,000 under Section 80CCD (1B) of the Income-tax Act, 1961 over and above the benefits for specified investments of up to ₹1.5 lakh under Section 80C.

Overlooking the tax benefits, a good retirement savings plan is a vital part of your financial planning. A pension account and a pension policy are its essential components. Keep in mind the depressing fact that pensions are taxable when you plan how to go about this investment. The advantages of NPS are well-known. Starting early means you accumulate a decent corpus which is invested in the capital markets over the years, smoothening the entry cost. NPS is a defined contribution system, which means your contribution is defined. This is the opposite of government pensions of the past, and many corporate pensions, which had a defined benefit system where the quantum of the pension was specified with no links to your contribution.

Under the NPA, your ongoing contributions are invested in a fund option of your choice ranging from pure debt to pure equity. You can switch at will, literally, the charges and costs of the system are low and you can open an NPS account and contribute and manage it including switching service providers and fund options online. On a pre-defined vesting date, a specified portion of the corpus in your NPS account can be commuted without tax and the rest, the bulk of it has to be applied towards buying an annuity policy from any life insurance company. Again, of your choice

Independent of this, you have a plethora of options for creating your own pension by buying an insurance policy directly. The annuity policy, which I referred to above, gives you an annuity, or a periodic pension, against a payment of premium. You can accumulate this premium over time or make a one-time payment. The former is called a deferred annuity and the latter, an immediate annuity.

But why? An annuity policy, or a pension policy, covers the risk of living too long and is the opposite of a life insurance policy that covers the risk of dying too soon.