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A Guide to Self-Employment Retirement Plans - Greyfont


A Guide to Self-Employment Retirement Plans

 

In today’s uncertain life, two goals that every individual must meet are financial independence and Retirement Planning. Though everyone has their own perspective when it comes to be financially independent, retirement planning is an issue that needs deeper planning after considering the various choices available.

 

Pension plans are one such option that ensure a safe and tension free retirement. Since there are several pension plans available, it is important to consider your own needs before you decide to choose one for yourself.

 

You must know the following features of a typical Pension plan to make the best choice-

 

1. Phases of Pension Plan - A pension plan has two phases:

  • Accumulation Phase
  • Annuity Phase

The accumulation phase is the period from the time a plan is taken to the time you retire. During this period you will need to pay regular premiums that are eligible for tax benefit under Section 80C/80CCC. At the time of retirement, 25 to 33% of the invested amount can be withdrawn which is again tax free.

However, the amount left is utilized to buy an Annuity plan which becomes the source of regular income until the death.

 

2. The benefits of the plan - The best thing about the plan is that it is not complicated and easy to implement. The only requirement is to be regular in the payment of your premiums. The regular payment of premiums is not only good for the plan but also a good discipline for compulsive spenders.

 

3. The compulsion of buying annuity - The compulsion to buy annuity in a pension plan with the balance 2/3rd amount becomes its biggest drawback. With this the investor loses the freedom to invest his money in any other investment plan that he might desire for his retirement planning.

 

4. Higher Taxation - In a pension plan, only the first amount withdrawn is tax free while in other investment options one can withdraw the entire amount without having to pay any tax. The pension received is taxable too.

 

5. Lack of flexibility - With the long term nature of pension plans, the funds get blocked for a fairly long period of time. During this period you cannot think of exiting the plan nor can you invest the same amount in a better investment deal.

 

6. Low Diversification - Diversification also gets constrained in case of pension plans where the main objective is to save tax and thus most people invest in just one plan. This limits the portfolio unlike in the case of shares or mutual funds where one can have a diversified portfolio.

 

7. Pension plan Vs. Personal Investment Portfolio - As discussed above pension plans have certain drawbacks that make investing in MF, EPF or PPF a more lucrative choice. Though the returns from all the above options are at par but you have the option of withdrawing the complete amount (tax free) at the time of retirement unlike in pension plans.

 

8. Unit Linked Pension Plans - Due to the flexibility and transparency that is offered in ULIP, they are a better choice as compared to the traditional pension plans.




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