Superannuation is a retirement plan that helps employees financially after they stop working. It is managed by employers, and employees make regular contributions during their careers. When employees retire, they get a lump sum of money or regular payments (pension). This money helps them keep up their lifestyle after they stop working.
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Superannuation, also sometimes called a company pension plan, is a retirement savings scheme offered by employers to their employees. It is basically a way to set aside money throughout your working life to provide you with financial security after you retire.
Contributions: Both you and your employer contribute money to a superannuation fund on a regular basis. The employer contribution is usually a percentage of your salary. You may also be able to make voluntary contributions.
Tax Benefits: Contributions to superannuation funds are often tax-deductible, which means they are taken out of your salary before tax is calculated. This can give your retirement savings a bit of a boost.
Investment and Growth: The money in your superannuation fund is invested and grows over time, hopefully outpacing inflation.
Retirement Access: When you retire, you can access your superannuation savings. You may be able to take a lump sum payment, purchase an annuity (which provides a regular income stream), or a combination of both.
The superannuation pension plans can be categorised as defined benefit and defined contribution plans, which serve similar purposes. Let us learn about them below:
| Aspect | Defined Benefit Plans | Defined Contribution Plans |
| Nature of Benefit | Fixed, predetermined pension or benefit amount. | Variable, depends on contributions and investment returns. |
| Employer's Liability | High, as the employer guarantees benefits regardless of fund performance. | Limited, as the employer's responsibility ends with contribution. |
| Risk | Mostly borne by the employer, who must fund shortfalls. | Mostly borne by employees, who manage investment risk. |
| Contribution Structure | Contributions are set based on the benefit formula, often a percentage of salary. | Contributions are typically fixed or percentage-based. |
| Retirement Benefit | Guaranteed pension or lump sum based on service and salary. | Accumulated fund balance, usually converted into annuity or lump sum. |
| Examples | Gratuity, Pension Plans | EPF, PPF, NPS |
Following are the types of annuities available under the superannuation scheme:
Immediate Annuity: You start receiving regular payments immediately after purchase. (This aligns with the concept of a pension)
Deferred Annuity: Payments begin at a future date you choose, typically used if you do not need immediate income.
Payable for Life: You receive regular payouts throughout your lifetime.
Return of Corpus: You get regular payouts for life, and any remaining corpus amount is returned to your nominee after your death.
Guaranteed for a Term (5/10/15/20 Years): You receive payouts for a fixed period you choose, regardless of your lifespan.
Joint Life Pension (With or Without Return of Corpus): Your spouse or partner continues to receive payments even after your death. This can be with or without a return of any remaining corpus.
Joint Life Annuity with 50% Pension to Spouse: Both you and your spouse receive payouts during life. Upon the first death, the surviving spouse receives 50% of the original payout.
Increasing Pension: Your regular payouts increase periodically to hedge against inflation.
Commutation: This is a one-time lump sum payment you can choose instead of receiving regular annuity payouts. However, this option forgoes the guaranteed income stream an annuity provides.
While India doesn't use "superannuation" for retirement plans, taxation on defined contribution plans (the most common type) follows these principles:
Employee Contributions: Contributions by employees are generally tax-deductible up to a specific limit (currently ₹1.5 lakh) under Section 80C of the Income Tax Act.
Employer Contributions: Up to a certain limit of the employer's contribution (often ₹1.5 lakh) is exempt from tax for the employee. Any amount exceeding the limit is considered a perquisite and taxed as income in the employee's hands.
Earnings on Contributions: The interest or returns generated within the plan are generally exempt from tax until withdrawal.
Withdrawals at Retirement: A portion of the corpus (usually around 1/3rd) is tax-free on withdrawal. This percentage can vary depending on the specific plan.
The remaining amount can be used to purchase an annuity (tax-free payouts) or withdrawn as a lump sum (taxable). The tax implications for lump sum withdrawals can differ slightly depending on the plan.
Superannuation retirement in India is important for securing your financial future after you stop working. It involves funds contributed by your employer to provide you with a steady income and benefits during retirement. This helps you maintain a stable lifestyle and highlights the need for careful financial planning throughout your career.
Purchasing an annuity: This provides you with a regular income stream for life or a chosen period.
Taking a lump sum: You can access a portion of the corpus as a one-time payment.
A combination of both: You can choose to split your accumulated amount between an annuity and a lump sum.
Retirement: This is a broader term, signifying leaving the workforce. It can happen at any age due to various factors like reaching a specific age, choosing early retirement, or even forced retirement due to health reasons. Retirement benefits are not necessarily included.
Superannuation: This is specific to employer-sponsored retirement plans where you accumulate funds and potentially receive benefits upon reaching a predetermined retirement age.
Superannuation: Employer-sponsored, often offers tax benefits on contributions, limited investment options, benefits depend on employer plan.
NPS: Individual investment account, offers wider investment choices, tax benefits on contributions and withdrawals under certain conditions, requires more active management.
†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in
*All savings are provided by the insurer as per the IRDAI approved insurance
plan.
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
+Returns Since Inception of LIC Growth Fund
¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.
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