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Why are Pension Plans Important?

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  | Published: 05 February 2020 | Last Updated On: 19 January 2021

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Pension plans are the ideal option to invest in, to save for your future needs. Many of us are often struck by thoughts of worry about our life after retirement. This is why, it is important to take an early interest in pension planning, as this will ensure that you are able to sustain your current lifestyle after you reach your retirement age.

In order to do this, it is important to understand all about pension planning and the savings involved, so that you come to a conclusion with the best pension plan that suits your requirements and is beneficial for you.

Before opting for a pension plan, you should be certain that you conduct widespread research and choose the plan that is the most valuable for your retirement age.

What is Pension Planning?

In simple terms, pension planning fundamentally works by saving sums of money over the years in order to have a sufficient lump sum during your retirement. The best pension plan for you will be the one that provides enough money to sustain your current lifestyle needs after your retirement.

Every pension plan has different benefits that are offered to you and therefore, varied pros and cons.

Pros of Pension Planning

The following are the advantages of pension planning in general, however, every pension plan has different benefits offered to the customer.

Savings

The most common and obvious benefit of having a pension plan is the savings that you invest during its tenure. These savings will benefit you after your retirement age.

Non-Taxable

In most cases, the amount that you invest in your pension plan from your earnings is considered to be your savings. This is the reason why usually it is non-taxable.

Added Benefits

If you invest in one of the best pension plans out there in the market, they ensure that your employer contributes an equal amount of money as you are contributing to your pension fund. This acts as a very useful added benefit.

National Pension Plans

If you consider buying a pension plan under the National Pension Scheme of your residing country, it offers you a wide range of investment options. The best pension plan for any individual would be the one that offers high returns now and sufficient payments after the maturity date i.e., your retirement age.

Cons of Pension Planning

The following are the disadvantages of pension planning in general:

Private Sector Pension Planning

The private sector pension planning contains the compulsory buying of annuities. If the annuities you buy do not offer you adequate returns, your savings may not turn out to be very beneficial.

Not the Ideal Backup

In the case of financial emergencies, pension plans may not be your most suitable backup option. The reason behind this is that if you withdraw your savings before your retirement age, the amount you withdraw will be taxable and there is also a penalty charge.

Pension Planning by Employer

If the pension planning for you has been done by your employer, there can be issues that arise if there is a situation where you want to change your job. There can be a problem of purchasing a new pension plan.

Government Employees

The people working as government employees receive savings on an annual basis towards their pension plans. These savings are restricted to the PPF (Public Provident Fund). The other investments in the market may offer higher returns for the same amount of money.

Restrictions on Withdrawal

Some pension plans in the market may place restrictions on the amount you can withdraw and how often you can withdraw, after your retirement age.

Additionally, in the private sector, one is required to purchase annuities, of which the rates are bound to fluctuate by the time the maturity of the pension plan arrives.

Opting for the Best Pension Plan

You should always go through the advantages and disadvantages of the different kinds of pension plans in order to attain the best plan for you. The lump-sum savings at your retirement age is largely dependent on the premiums that you pay in the present.      

Therefore, it is important to be aware of how much you can afford to put towards your pension planning. The best pension plan for you will be the one that makes optimal use of your present income in order to provide you with sufficient funds after your retirement age.

A pension plan that is able to provide you with an adequate and regular income after your retirement age is the best pension plan for you. It is also important for you to see how your savings can enhance your finances in the present.

With these considerations, it is highly likely for you to find the pension plan that is the best for your lifestyle requirements and needs.

The Bottom Line

To further conclude, pension planning is mainly focused on removing the stress of how you will sustain your current lifestyle after your retirement age.