Pension funds are retirement funds. They are known as the retirement income for the employees. The employers or employees or both of them together pool some money at the end of every month which goes into the pension fund of that individual. This is to ensure that the employees have some money with them to carry on their daily life after retirement. These funds also guard the employees against the uncertainties of life. The employers make sure that the employee’s family or the employee itself is supported so the pension funds come to existence.
Previously there was a concept of per month pension payment which is very famous in the government segment. Nowadays people are shifting toward pension funds and provident fund schemes and the concept of pension per month has ceased to exist.
Pension funds allow an individual or employer to invest with a time frame method. There are options available to the investors whether he or she wants to pay all the amount upfront or make timely payments for the fund. Also nowadays investing in such funds is very necessary though a person has some savings with him.
Stages of Pension Funds
Now the concept of pension funds is divided into two stages in India. The first stage is the accumulation stage and the later one is the vesting stage.
Accumulation stage refers to the entire time period during which the investments are made by the investor. The investor either makes a payment upfront or makes timely payments into the fund. This process continues until he or she is working or any uncertainties occur in life.
The later stage i.e. Vesting stage is the disbursement of the funds to the investor in the retirement period or the nominee in case of uncertainty. The retired person receives annuities based on the amount of investments he made. These annuities are dependent on the investment amount by the employee during the accumulation stage.
Tax Implications for Pension Fund
In India contribution or investment in pension funds are having an exemption limit under section 80CCC. The ceiling limit to the exemption is 1.5 lakh Rs. Hence any pension income upto 1.5 lakh Rs is not taxable. These contributions include new investment or renewal of previous plans. The Residents or NRI (Non residents) both can claim the deductions but there is an exemption for HUF (Hindu Undivided Family) for the same. Hence HUF is not entitled for such deductions.
Now the withdrawals of the pension funds are also taxable. The one third amount of the fund is not taxable at all. The retiree gets one third amount of corpus on retirement by the fund and that amount is not taxable. The annuities after that are all taxable. The tax rate is decided based on the last salary income of the prison when he or she was working.
The Types Of Pension Funds In India
The pension funds are classified into three types in India. They are :
The insurance companies sponsor the pension funds. The investors have to pay the amounts in debts and they get the benefits of the funds on retirement by the insurance companies. LIC has multiple schemes running under the name of pension funds. It carries the lowest risk profile in pension funds.
ULP or Unit linked plans get investment from the employees and they invest it. Their investments are majorly targeted on the equity market and debt market. The risk associated is a bit high due to equity market investment but the investors prefer this due to more returns available. It tends to bring balance into investors’ portfolios.
The National pension scheme or NPS is sponsored by the government. These funds invest the money into government securities or debt securities. It Has less risk profile than ULP but more than insurance companies. NPS ranks 28th in the list of top pension funds across the world with an asset base of 61 billion dollars. It came into effect in 2004.
Benefits of Pension Funds
- Pension funds is a long term investment fund. It saves small amounts across a longer time frame which enables a person to get significant savings at the time of his or her retirement. Also small amounts don’t harm much to the person’s daily life expenses.
- It gives the person the option to invest either in monthly (timely) payments or in lump sum.
- They create annuities for the person so that he receives the amount in near range of his or her salary to maintain the daily lives during retirement. Also one third portion of the fund is given upfront at the time of retirement in many schemes.
- Many funds also provide plans where in case of retirement or death of the investor the whole amount or lump sum amount is paid back at one go. Hence the person receives all the retirement income at the retirement time. This allows the investor to divest those funds into multiple sources and create passive sources of income.
- Indirectly the above scheme also provides the inventors with the insurance scheme.
- The pension funds also eradicate the inflation effects and provide the returns which are already adjusted to inflation rate. Hence the person has an income to maintain his life with his actual standard of living.
Shortcomings of Pension Fund
- The deduction amount available is very less in pension fund accounts. The amount available is just 1.5 lakh Rs. which is technically very low. Also at the time of withdrawal 2/3rd of the amount receivable in annuities is taxable as per the last pay scale.
- The high return funds carry a lot of risk. The insurance companies provide funds but they are having low returns. So if you opt for the safety option you cannot earn adequate returns on your investments.
- Also having a retirement fund is mandatory so one cannot take more risks in such matters. So very keen planning towards investing into multiple funds is required. But when one opts for a new fund then he is liable to pay tax under the contribution norms in section 80CCC.
- These types of funds are best suited for those who start investing at an early stage. The ones who are in their early twenties get the maximum benefit of such funds then the rest of the investor class. So in one way it is biased as no one can control time.
Top 5 Pension Funds In The World
There are various such funds present across the world. Among them the best ones are as follows :
- Social security Trust Fund – It is from the USA. It has assets worth more than 2.9 trillion dollars. It invests into special US treasuries.
- Government Pension Investment Fund – It is based in Japan. It has an overall asset base of more than 1.5 trillion dollars. It invests mainly into Japan bonds (55% of investment)
- Military Retirement Fund – It is from the USA. It has an overall asset base of 813 billion dollars. Its investment is spread across multiple market options.
- Federal Employees Retirement Fund – It is based in the USA. It has an overall asset base of more than 689 billion dollars. Its portfolio for investment is very diversified.
- National Pension Service – It is based in Korea. It has an overall asset base of more than 610 billion dollars. It invests only into Korean Securities.