Future planning can be tough, especially with regard to financial security in your sunset years. A term that mostly arises while talking of retirement is pension. So, what is pension? A pension is essentially a regular income that you receive when you retire. Think of it as payment for your years of service or contributions. It is a way to passively generate income even when you can no longer get a salary.
India’s pension system is composed of pensions provided through government bodies, publicly owned companies, private employers, and individual contribution schemes. It aims to provide an acceptable standard of living when you retire from work, thus providing financial security after your normal working years are over.
How Does a Pension Work?
These schemes usually function in the following ways:
- Contributory Schemes: Employers and employees contribute towards pension funds throughout the working life. The contributions accumulate and grow over time, enabling an income source once you retire. Some schemes, like the National Pension System (NPS), also allow individual contributions.
- Non-Contributory Schemes: Historically, some government employers offered funding for the entire pension, but most government employees who joined after 2004 are now part of contributory schemes like the NPS.
Why is a Pension Necessary for Retirement?
- Financial Freedom: A pension assures you a consistent income after you stop working. This financial cushion is essential to meet basic daily expenses and pay for medical costs while in retirement.
- Mental Peace: You will be at peace mentally, understanding that you will gain an income steadily once you retire. It will help you live your sunset years peacefully, without much worry about falling short of funds. However, it is important to ensure that your pension is adequate to meet all your needs.
- Overall Longevity: With growing life expectancy (approximately 70 years in India), individuals may anticipate living for 10-15 years post-retirement. Pensions enable effective financial management throughout this extended duration.
Various Kinds of Pension Schemes
Here are a few pension scheme choices worth considering:
- EPF & EPS: The Employees’ Provident Fund (EPF) is a preferred investment scheme for building your savings for retirement, where both employers and employees contribute. A part of the corpus goes into the Employees’ Pension Scheme (EPS), which provides a pension.
- APY: Atal Pension Yojana is one of the popular plans catering to the unorganized sector in the country. It offers guaranteed pensions to people based on their contributions, up to ₹5,000 per month.
- NPS: The National Pension System is a voluntary plan (mandatory for central government employees who joined after 2004) that offers a pension and investment-related benefits.
- PPF: The Public Provident Fund is a long-term savings scheme with tax deductions. While it is not designed as a pension fund, it can be used as part of your retirement savings.
How to Plan for Your Pension?
Planning your pension can make a great difference. You can keep these tips in mind:
- Begin Early: The earlier you begin saving for a pension, the more money you can accumulate via compounding.
- Selecting the Proper Scheme: Evaluate your financial objectives and choose a pension scheme tailored to your needs.
- Review Your Schemes Regularly: Monitor the contributions and review your investment plans regularly to ensure that they align with your objectives for retirement. This is especially important for market-linked schemes like NPS, where you can adjust your investments.
Conclusion
Pension is vital for ensuring that your old age is peaceful and secure. Planning your retirement should be your priority above all else. Knowing how pension plans work will help you make informed decisions down the line.
