Planning for your retirement is an elaborate process; the earlier you start, the larger corpus you end up with for your retirement. Generally, young investors prefer to invest in some of the high-risk instruments at the start and gradually move towards stable instruments as the retirement age approaches. But among the different forms of investments for your retirement goals, pension plans are the final leg of these investments.
As your high-risk investments mature, retirement or pension plans are the next stage of investments. These life insurance policies offer guaranteed income post-retirement, thereby being one of the safe investment avenues to offer capital protection and growth.
Pension plans can be classified into different types based on the frequency of their payments. Some pension plans require you to pay a periodic payment to keep the policy active, while there are some policies that require you to pay just once at the beginning.
Let’s look at all you need to know about single premium pension plans –
What is a single premium pension plan?
Single premium pension plans are those retirement policies where you can invest a lumpsum amount. Unlike other insurance plans where periodic payment, either monthly, quarterly, half-yearly or annual payment is required, a single premium pension plan requires the policyholder to pay the premium only once to keep the policy active for its entire duration. Thus, once you have made the lumpsum payment, no further payment is required from your end to continue receiving any policy benefits.
Busy work-life scenarios may often result in situations of missed instances of paying your premium. In these circumstances, a single policy premium eliminates such a situation of missing to renew your policy on time. Since it involves no regular payments, all you need to do is make a large lumpsum payment at the beginning and then relax. Once your retirement age kicks in, this pension plan starts to support you with regular payments from the money you have deposited.
Types of single premium pension plans
There is no one type of single premium pension plan, but many are available to choose from. While every policy has its own unique features, you can pick one that meets your investment objectives. All plans have one common feature, which is providing stable returns in your golden years. There are two broad categories:
- Traditional single premium plans
Traditional single premium plans or non-linked plans are policies where the investments are made in instruments that aren’t market-linked securities. Thus, government bonds or corporate bonds are some avenues where your lumpsum payment is invested. These plans provide predictable and stable returns throughout their period. They can be further classified as deferred annuity and immediate annuity plan.
- Deferred annuity plan
A deferred annuity is a policy where the income to be received is deferred to a later specified date after the payment of the premium. Thus, the insurance company agrees to pay the annuity to a future date after a minimum waiting period of one year.
- Immediate annuity plan
Unlike a deferred annuity plan, an immediate annuity pays almost immediately rather than at a future date. The one-time premium payment towards your annuity plan is paid by the insurance company as a regular stream of income.
- Unit-linked pension plans
While traditional pension plans do not invest in market-linked securities, a unit-linked pension plan does. These investments are made in instruments like equities, or debt instruments that are available in the market based on your risk appetite. There are many options for increasing your wealth in the long run by using unit-linked pension plans. Since they provide returns based on the performance of financial markets, they are riskier but carry higher returns. Thus, it has a higher risk-to-reward ratio. ULIPs, NPS and equity-linked pension plans are examples of unit-linked pension products.
What are the advantages of buying a single premium pension plan?
A single premium pension policy has the following prominent advantages:
- Since a one-time investment is required, there are no further commitments necessary from your end as a policyholder. Large maturity proceeds from your investments can be invested in a single premium policy that pays systematic income during your retirement.
- These pension plans also provide life cover that even includes protection for life-threatening diseases. In addition, your spouse can also enjoy the pension in the event of your unfortunate demise.
- A deferred annuity pension plan allows you to borrow funds against the policy in case of a financial emergency before the pension begins.
- Since the investments are made in securities that do not invest in market-linked instruments, you can be confident of receiving the pension amount for the selected period.
Lastly, you can make use of a retirement planning calculator in deciding which policy to select according to your requirements.