“Pension Plan for Self-Employed: What You Need to Know Before You Start”

Self-employed individuals often face challenges such as no employment benefits, uncertain income, no retirement benefits, etc. Planning a pension plan for the self-employed is important as it provides financial security & mental peace in case of the sudden demise of an individual. There are many different pension plans available in India depending on the varied factors, such as retirement requirements, financial goals, risk tolerance, & personal preferences. Retirement plans help provide financial support during your post-retirement period, enabling you to meet your post-retirement goals.

Examples of Self-Employed Individuals

Self-employed individuals are individuals who work for themselves, rather than working for an employer. These individuals either operate through a business or render some specific services, which include the following:

• Writers, designers, and consultants for various clients & not employees,also known as freelancers.
• Café owners, small shop owners, restaurants, etc.
• Plumbers, electricians, etc.,work independently on different projects for varied clients.
• Gig workers who earn their wages through short-term tasks, mainly through an online application or platform.

How to Choose the Best Pension Scheme for Self-Employed Individuals?

Provided are the factors that should be considered while choosing the pension plan for self-employed:

• Risk Tolerance:

Evaluate the acceptable level of risk, i.e. if you prefer low risk, opt for Public Provident Fund or Atal Pension Yojana. And, if you are willing to take a high risk, mutual funds or the National Pension Scheme are a better option.

• Investment Horizon:

It means the time period for which an investor holds an investment prior to the funds being required or sold. The longer the investment horizon is, the greater the benefit of compounding you receive.

• Tax Benefits:

Consider the tax benefits and implications associated with the plan.

• Flexibility and Liquidity:

Evaluate the flexibility and liquidity of the pension plan in terms of contributions and withdrawals made.

Importance of Buying a Retirement Plan for Self-Employed Individuals

Provided below are the benefits of buying a retirement plan:

• Guaranteed Returns Benefit

It provides you with a guaranteed regular source of income once you retire, without worrying about the delays.

• Financial Security for Your Family

The family members will receive the death benefits in case of the sudden demise of the policyholder. In the case of a joint annuity plan, the death benefit would be received by the second annuitant if the first annuitant dies.

• Creation of a Stream of Regular Income

It helps create a regular source of income, either as a lump sum or in monthly form, to meet routine expenses.

• Get Tax Benefits

It offers different tax deductions & exemptions based on the type of pension plan bought.

• Secure your Property & Assets

If you have planned your retirement well in advance, you will be able to secure your assets & property, i.e. you will not need to sell them off.

Different Pension Plans Available for Self-Employed Individuals

Provided are the different pension plans available for self-employed individuals:

• National Pension Scheme

The National Pension Scheme (NPS) is a voluntary contribution pension savings plan designed for employees and the self-employed as well. Under this plan, the amount should be invested at regular intervals, some percentage of which can be taken out after retirement. The remaining amount from the corpus can be received after retirement, just like the monthly pension amount.

• Public Provident Fund

A Public Provident Fund is a type of long-term investment plan backed by the government of India, offering attractive interest rates along with returns. The amount to be deposited in the fund ranges from INR 500 to INR 1,50,000 each financial year, either in EMIs or lump sum. The amount deposited, maturity amount & interest amount are totally exempt from taxes.

• Equity investments

Those self-employed individuals who can accept risks can invest in equity funds, such as SIP, to get higher returns. Apart from SIPs, there are some renowned tax-saving schemes, such as ELSS, that offer tax advantages along with growth.

• Real Estate

They are considered to be consistent & valued types of investments when it comes to your retirement planning. Additionally, the amount of rent receivable from a property is generally on the higher side than the growth of the property itself. It also offers tax deductions u/s 24(b) on the amount of interest received on home loan & on the amount of principal amount reimbursement u/s 80C.

• Fixed Deposits

Be it a regular or tax-savings fixed deposit, they are low-risk investment plans offering a definite return. Tax-saving fixed deposits offer benefits u/s Section 80C of the Income Tax Act, 1961 and come with a 5-year lock-in period.

Steps to Buy Retirement Plans

Follow the steps below to buy a retirement plan:

Step 1:Evaluate Your Retirement Goals

Initially, evaluate your retirement objectives by analysing the lifestyle you visualise during your retirement period & make an estimate of the expenses that would be incurred. Also, identify the correct age of your retirement & select a pension plan that best suits your requirements.

Step 2:Understand Different Retirement Plan Options

Evaluate the options available, i.e. Pension or annuity plan & choose the one that best suits your financial requirements.

Step 3: Seek Professional Financial Advice

One can also seek professional advice from a financial advisor regarding the complexities involved, if any, in the retirement plan. He will also help evaluate the present financial situation & choose the perfect plan as per your financial requirements.

Step 4: Compare Plans & Providers

Compare the different retirement plans available in the market on the basis of fees charged, customer service, investment options, reputation of insurance service provider, flexibility offered, etc. 

Step 5:Review the Plan Documents

Review the documents related to the pension plan by reviewing the terms & conditions related to the contributions, withdrawals, penalties charged, etc.

Step 6: Make Premium Payments & Monitor Your Plan

Next, monitor your pension plan & make regular premium payments towards your plan. Always consider a payment schedule to make timely premium payments & stay updated.

Step 7: Periodically Re-evaluate Your Retirement Plan

It is important to make a continuous evaluation of the plan to ensure it aligns well with your financial objectives.

Conclusion

Whether you are a salaried or self-employed individual, a pension plan is vital for all. It is considered to play a crucial role in maintaining the financial futures of family members. It is an important financial tool that helps provide financial security & mental peace if the requirements are correctly ascertained & proper planning has been done.