Retirement Planning is a process of setting up financial objectives for the post-retirement life & creating wealth to achieve them during the retirement period. This includes identifying future sources of income, estimating future expenses, & making a well-informed decision to ensure there are enough funds to maintain the desired lifestyle during the post-retirement period. Annuity & pension plans are two types of retirement plans that help to meet retirement objectives, each having its own pros & cons. Let us now discuss them in detail.
What is an Annuity Plan?
An annuity is a financial agreement entered into between a policyholder & an insurance company. It is a long-term plan where an individual invests their funds either in instalments or in a lump sum. &, the insurance company releases a payout amount, either variable or fixed, for a fixed period or for a lifetime. It is a contract in which funds are invested either in instalments or in full to get a regular payout amount, either for a fixed number of years or for a lifetime.
What is a Pension Plan?
A pension plan is an investment plan that is well-designed to fulfil all your day-to-day needs once you retire. One can also save by investing money through regular payments or a lump sum over a specified period. Retirement plans are investment strategies that help individuals post-retirement to build their pension fund. These plans are low risk, with a regular flow & a pre-fixed amount of income that would be received post-retirement. There are many different pension plans available in India depending on the varied factors, such as retirement requirements, financial goals, risk tolerance, & personal preferences.
Difference between Pension & Annuity Plans in India
Provided are the differences between Pension & Annuity Plans in India:
| Basis of Difference | Annuity Plan | Pension Plan |
| Payouts | These plans offer guaranteed payouts at regular intervals for a pre-specified duration. Also, investors are provided with an option to choose the details, i.e. how & when they desire to receive the payments, depending on their financial requirements. | These plans include payment of the corpus funds post-retirement, which may be either a lump sum amount or regular payouts. |
| Amount to be received | The amount to be received will depend on the amount that was invested by the annuitant over a certain period. | The pension amount here depends on the amount that was earned as salary during their job tenure. |
| Who can receive | An annuity plan can be bought from an insurance service provider by any individual. | The benefit of pension plans is provided by an employer to its employees. |
| Who is responsible for managing | The core responsibility of managing an annuity account & contributing funds lies with the investor themselves. | The core responsibility to open & manage a pension account lies with employers. |
| Transparency | This account provided high transparency as this account is managed by the investor himself. | As these accounts are managed by employers, this account offers less transparency. |
| Charges | These plans include account management fees & invest funds on the investor’s behalf. | These accounts are maintained free of cost by the employers. |
Benefits of Annuity Plans
After understanding what is annuity plan & its differences from the pension plan, let us now understand its benefits:
- Guaranteed Income:
An annuity plan offers an assured stream of income fulfilling the financial requirements of the retirees. These plans offer financial stability to them without worrying about the savings getting exhausted.
- Tax-Deferred Growth:
These plans come with the benefits of tax deferment, which means taxes are deferred till the time withdrawals are made. This helps your funds grow faster in comparison to taxable investment plans.
- Customisation:
This plan allows you to customise your plan as per your financial requirements, objectives, risk tolerance level, & investment horizon.
- Lifetime Income:
Some of the annuity plans offer lifetime income, ensuring financial support throughout the life, eliminating the risk of savings getting exhausted.
- Death Benefits:
Some of the annuity plans offer death benefits, which offer financial support to the family members in your absence.
- Creditor Protection:
These plans also provide coverage from creditors under certain circumstances, saving your funds from unexpected problems, such as loss of job, financial losses, medical emergencies, or accidents etc.
- Diverse Payout Options:
This plan offers multiple payout options, providing you with flexibility.
Benefits of Pension Plans
Provided are the benefits of pension plans:
- Steady Income Stream:
This plan provides a regular income source throughout retirement, ensuring financial support for the family members.
- Tax Advantages:
The contributions made towards the plan are eligible for a tax deduction, which reduces the tax burden. Additionally, the growth of funds is tax-deferred.
- Market Volatility Protection:
Some of the plans offer assured returns, protecting the individuals from market volatility.
- Mental Peace:
Knowing that there is an assured income source post-retirement offers mental peace.
- Survivor Benefits:
These plans also offer continued benefits to the family members after the policyholder’s demise.
- Long-Term Financial Security:
These plans offer long-term financial security, removing the risk of savings getting exhausted.
- Diversification of Retirement Portfolio:
It helps in diversifying the portfolio by building reliable & stable income sources in future.
- Employer Contribution:
The contributions made by the employer help increase the total retirement savings.
Annuity vs. Pension Plans – Which One to Choose?
- For salaried workers:
Pension plans offer security & financial stability supported by the employer, & annuities further add to safety levels.
- For self-employed workers:
Annuity plans help build a retirement income.
- For early savers:
Opt for a deferred annuity plan, under which payments are started after some time, providing investments to yield returns.
- For immediate needs:
Opt for an immediate annuity plan fulfilling immediate needs without any wait.
Conclusion
One should understand the difference between the two plans, namely annuity & pension plans, to make an informed decision. Where annuities, on one hand &, are opted for depending on the individual choices & can be customised according to the financial position. A pension plan, on the other hand &, offers a secure & stable income post-retirement, fulfilling long-term financial requirements.
