Planning for retirement is one of the most crucial aspects of our lives. We work for almost 7-8 decades and save substantially, and then when the hour of retirement comes, what do we do? The most common options considered by Indians are either a commuted pension or investment in a senior citizen pension scheme in India. Both of them work differently to fulfil different financial needs of a person in retirement. So, it is essential to understand the features of both in order to arrive at a wise decision.
Know the Commuted Pension
Commutation of pension is an option wherein a pensioner chooses to receive a lump sum amount in consideration of a certain percentage of his monthly pension for the rest of his life.
- In this pension scheme, an individual commutes a percentage of the pension for the gratuity on the present value.
- The employer, on behalf of the government, calculates the value of the pension and pays the employee a lump sum amount, which reduces his monthly pension amount.
- The lump sum amount paid to the pensioner in the case of government employees is fully tax-free.
- In the case of employees in the private sector, a percentage of this commuted value is tax-free depending upon the receipt of gratuity.
The immediate payout of the lump sum amount is suitable for situations where an employee has financial obligations immediately after retirement, like family weddings, home loan repayments, etc.
Know the Senior Citizen Pension Schemes in India
“Senior citizen pension schemes” refer to various investment schemes that offer regular and assured income to people aged above 60 years.
- Some of the most common schemes are the Senior Citizen Savings Scheme and NPS with an annuity option.
- Such schemes provide regular income to the investor on a monthly, quarterly, or yearly basis depending upon the choice of the subscriber in order to meet day-to-day expenses during their old age.
- Such schemes offer competitive returns as compared to fixed deposits and also have tax benefits on the amount invested under section 80C. .
- The income from such schemes is added to the income of the investor and taxed accordingly.
- These are suitable for those investors who need regular income for their day-to-day needs without taking too much risk with their hard-earned money.
Commutation Pension versus Senior Citizen Pension Schemes
Now the question is which of these pension schemes is better and more beneficial for the retired employees? It depends upon the need of the hour as far as the financial needs of the retired person are concerned. These two options can be compared on the basis of the following factors:
- Payout Structure: A commuted pension offers a large lump-sum payout and then a reduced monthly pension, while senior citizen pension schemes offer assured fixed monthly payouts over a long period of time.
- Flexibility: A commuted pension offers flexibility of utilization of a lump sum amount, while senior citizen pension schemes do not allow access to the corpus.
- Return / Risk: While returns on commuted pensions depend upon the prudence of the investor in investing the lump sum amount, the returns on senior citizen pension schemes are assured without any risk.
- Taxation: Commuted pensions for government employees are completely tax-free, while senior citizen pension schemes offer tax benefits on the amount invested but not on the returns earned.
Pros and Cons of Commuted Pension
Pros:
- The lump sum amount received in case of a commuted pension can be utilized for fulfilling big financial needs right away.
- It offers big tax benefits, particularly to government employees.
- The lump sum can be invested in better-performing schemes to earn higher returns.
Cons:
- It reduces the monthly pension amount for a long time, which may not be enough to meet day-to-day expenses for a longer time.
- It may not be possible to make prudent investment decisions with the lump sum amount.
- The commuted value for private-sector employees may not be completely tax-free.
Pros and Cons of Senior Citizen Pension Schemes
Pros:
- Such schemes assure regular and sufficient income for meeting day-to-day expenses.
- The returns on such schemes are risk-free due to government backing
- Investors can claim a tax deduction on the amount invested under section 80C.
Cons:
- The amount invested in such schemes cannot be withdrawn before maturity in case of need.
- The returns on such schemes are locked in for a long period of time and may not keep pace with rising inflation.
- The monthly returns on such schemes are subject to income tax.
Which Pension Scheme to Choose?
It is now clear that the decision to choose between a commuted pension and a senior citizen pension scheme in India depends upon the need of the hour. If you have some financial obligations due at the time of retirement or shortly after retirement, then it makes sense to opt for a commuted pension. Similarly, if you need regular income to meet your day-to-day expenses without taking much risk, then senior citizen pension schemes are a wise choice. Also, if you are a government employee, then opting for a commuted pension makes more sense, as it is completely tax-free. However, if you are ready to invest some amount regularly and want to keep your monthly pension amount intact, then again, senior citizen pension schemes are a better choice.
Combining Commuted Pension with Senior Citizen Pension Schemes
It is not mandatory to choose either of the two options. There are plenty of opportunities available where you can combine a commuted pension with senior citizen pension schemes. For example, you can commute a small percentage of your pension to meet your short-term needs and invest the lump sum amount in a senior citizen pension scheme in India of your choice.
Alternatively, you can keep your monthly pension amount as such and utilize that for day-to-day expenses of your retirement and also open a separate FD in a bank for emergency needs. All this helps you to stay financially sound throughout your retirement life.
So, it is wise to look at your financial needs before making a choice. It is always better to choose the option that keeps your money working for you for a longer period of time in order to assure sufficient income for your retirement life.