An individual needs to have an appropriate retirement plan for regular income and financial freedom in the post-retirement phase of your life.
There are two aspects of a pension scheme or a retirement plan: Accumulation Aspect and Distribution Aspect. In the former, an individual does premium payment at regular intervals like monthly or quarterly to gather enough resources for their retirement. And in the latter, collective funds from premium payment get back to the individual as pension in the post-retirement phase.
A pension scheme is a simple yet efficient tool in the financial world because it helps to sustain resources that are crucial for an important phase of life when a person needs regular income but is not able to earn for himself because of both physical and mental limitations.
Some people ignore having a Pension scheme because they think that their hard-earned money gets blocked in these schemes. This mentality of saving later is one of the main reasons why more than 40% of the elderly population of India are still participating in economic activities instead of getting a retirement, provided that there are 138 million elderly aged people present in India by 2021.
If you don’t want to end up above 40%, this guide will help you with more reasons that satisfy you to agree to a pension scheme and invest some part of your income in it regularly.
Reasons That Make Pension Scheme Important
1. Compounding Gains
Compounding gains is one of the major tools to create enormous amounts of wealth during a long-term tenure. The compounding means your earning of a particular time frame reinvest to generate higher interest than the previous one. And like this, the cycle goes on until you decide to exit. It is essential and that’s why it is provided by almost all the best pension plans.
In this, you have to pay the premium, and the pension scheme helps you to build financial aggregations of funds for your retirement with the help of compounding gains. The only condition for bearing fruits of compounding gains is to invest regularly for a larger time frame. The longer you stay the maximum you can extract through compounding gains on your investment amount.
2. Offers Investment Plans With Insurance
Any investment plan consists of both investment and insurance aspects. It is a special category that falls under insurance that is created to ensure post-retirement financial needs. An individual can select a pension plan with the element of investment from traditional types to unit-linked types in best pension plans depending on the risk capability of the individual. The risk capabilities vary from higher to balanced to conservative. The risk factor also depends on the duration of enrolling in a pension scheme. The duration plays an important role in risk averaging means for the long term the returns are higher with lower risks independent of market fluctuations and volatility, unlike short durations where market volatility and fluctuations lower the returns at very extents.
In most pension schemes there is a facility to top up the premium payment with the increment of income so that one can accumulate more funds for their post-retirement plan.
3. Hike In Inflation Rates And Life Expectancy Rates
Inflation attacks directly the budget of an individual by increasing the rates for their day-to-day living expenses. With the hikes in inflation rates in India, it is crucial to have a Pension Scheme. In the past year 2020, the inflation rate in India is about 6.2%, which is 1.44% high from 2019. It is about 3.6% in 2017 which means almost half from today.
That’s why it is important to have a proper retirement plan so that one can invest today and gain higher returns and as well as secure themself and their family during the post-retirement period and hence Pension scheme is a way ahead for future financial independence.
4. Limited Social Security Initiatives In India
In comparison to other countries, India lacks with their weak social security initiatives for the citizens. Social security initiative means that a government regulatory agency takes actions for the well-being and facilitates the basic requirements for the citizens of a country depending upon several aspects like age, qualifications, disabilities, etc.
When an individual is not capable of earning regular income for themselves and their family then these initiatives help them as a financial backup. But in India only a few such initiatives are active and they are not enough for a population as big as India’s one. Hence Pension scheme is vital to surviving in the post Retirement period.
5. Tax Advantages
It is always beneficial to have a pension scheme at a very young age because the larger you save the more it makes for your future. And a time comes when your invested money is earning an income for you. The pension scheme also helps individuals to save part of their income tax under Section 80C of the income tax act.
Within a Pension scheme, one can save taxes and premium payments, retrieval of accumulated funds, etc. Also, there are various benefits provided by the best pension plan like participating benefits, maturity benefits, death benefits, loyalty benefits, etc.
6. Safeguard For Your Family
Your life is precious for yourself and as well as for your family. It is more precious for them especially if you are the only person in your family to have a regular income source. That’s why a person needs to save and invest enough in their working years so that they can meet the financial goals of both their own and family. It is where the insurance component of the pension scheme comes into play. It ensures the complete financial freedom of your family in case of any mishap happening with you.
The Takeaway
A pension scheme is a crucial tool for the post-retirement period of any individual to rescue yourself from financial dependencies in the later stage of your life. It is vital especially in the modern scenario when inflation and weak social security have their weight more than any time in the economy of India. With this all in mind, in this guide, one can find enough reasons to agree that having a Pension scheme is beneficial for their later part of life.
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