Academic journal article Advances in Management

Case Study: A Study on Awareness about Pension Plans among Working Individuals

Academic journal article Advances in Management

Case Study: A Study on Awareness about Pension Plans among Working Individuals

Article excerpt

Introduction

Pension Plan is a kind of insurance cum investment plan. In this plan, the insured pays regular premium to the insurance company to build up a corpus over time. On maturity (retirement), this corpus is paid back to the insurer in the form of regular income. However, in case the insured dies, the beneficiary will get the sum assured along with the bonuses, if any. Thus pension plan assures a regular income post retirement when you enter the no-more-paychecks phase of your life.

It funds your to-do-lists post retirement hence pension plan is a great way to be financially independent in your second innings. Even if a person has provident fund, he may take pension plan because mere provident fund is not enough to meet the post retirement expenses. The money in the fund is usually invested in long-term, low-risk growth investments. The plan is typically tax deferred which means the contributions made to the plan are not subject to income taxes, nor is the investment income. Taxes are not due until money is taken out of the fund in the form of retirement income payments. This tax advantage provides employees with a lucrative way to defer part of their current wages and salary for use as retirement income.

Pension Plans can be classified on various parameters.

On the basis of Contribution and benefit

a. Defined benefit plan - A defined benefit plan is the traditional style of pension plan where workers' retirement benefits are calculated (and thus "defined") by a formula that takes into account their years of work at the company and their salary history. The employer controls the plan and its assets and guarantees that the employee will receive a certain amount of retirement compensation regardless of how the underlying assets in the plan perform.

b. Defined contribution plan - A defined contribution plan is the more modern type of pension plan. In these types of plans, the employee controls the amount contributed to the plan as well as how the funds are invested. Retirement benefits depend on how the fund assets perform and grow.

c. Hybrid Plans - Hybrid plan consists of combined features of defined benefit and defined contribution plans. These plans are more like defined contribution type and Retirement benefits too depend on the performance of underlying fund asset but here a certain amount is guaranteed to the participant.

2) On the basis of mode of premium payment

a. Deferred Annuity Pension Plan - The premium is paid regularly on a monthly/quarterly/annual basis. The annuity begins after a time period as specified by the policyholder in the annuity contract.

b. Immediate Annuity Pension Plan - A lump sum is paid as a one-time premium and the annuity begins almost immediately and continues for the policy term or throughout the insured's life.

3) On the basis of nature of investment

a. ULIP Pension Plans - The pool of funds created by the premiums of the insured persons is invested both in debt instruments and equity instruments. Since it is a market linked plan, the potential for returns is high.

b. Traditional Pension Plans - The pool of funds created by the premiums of the insured persons is invested only in debt instruments. The returns are steady but not substantial.

4) On the basis of tenure

a. Life annuity Pension Plan - The annuity is paid out to the insured until his/her death.

b. Fixed Term Annuity Pension Plan - The annuity is paid out to the insured until a fixed term (decided by the policyholder). The term could be quite earlier than the insured's death.

One of the lucrative features of pension plans is that as per section 80CCC of the Income Tax act, the premiums paid out for the pension plan are subjected to a deduction of up to a maximum of Rs 10,000 on taxable income with the urbanization and modern life style more and more joint families are taking the shape of nuclear families so the requirement of financial planning for the post retirement years is also increasing and pension plans are one of the important sources to fund post retirement years. …

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