After your retirement, you are not working and would also not have a regular source of income. However, you will still require funds to meet your expenses and lead an independent life. A fund is needed which would meet your expenses and you need to make plans to create this fund when you are working and earning adequately.
By Pension Plans, you are making an investment today for the creation of a corpus. When you are into your retirement phase, annuity payment is made from this corpus throughout your lifetime.
Let us talk about the different types of pension plans that are available in India.
- Traditional Pension Plans
- Unit Linked Pension Plans
- Employer’s Pension Plans
Let us understand the 3 types of pension plans available in India.
1. Traditional Pension Plans
This is the most common form of pension plans available in India. In Traditional Pension Plans, you pay premium to accumulate your corpus for Pension. Thus, when the time comes, i.e. vesting age, for pension to begin, you can convert the corpus to provide pension to you for the rest of your life.
Now, there are 2 further types of Traditional Pension Plans available in India. In insurance parlance, pension is called Annuity and the person who receives the annuity is called an annuitant.
a. Deferred Annuity Plan
A deferred annuity plan is when you buy a pension plan early in life, so that you can accumulate your pension corpus during the entire tenure. When the time comes for you to opt for pension, i.e. an income for the rest of your life, you can start reaping the benefits.
Thus, in deferred annuity plans, your pension does not start immediately after the policy begins. There is a deferment period and the annuity only start from the vesting age.
- In the Deferred Annuity Plan, you would purchase a plan with a specifically chosen term
- You would create a corpus within this chosen period which can also be referred to as the accumulation phase and annuities would be paid after this phase is over
- The pension plan would vest or mature after the accumulation phase is over
- The vesting period or the pension phase indicates that the annuity phase of the Pension Plan would begin and fixed annuity pay-outs are paid from the corpus that has been accumulated
- You can also be able to earn a bonus in traditional deferred annuity plans
- At the time of vesting, the annuitant has the option to withdraw 60% of the corpus. However, only 33% of the total corpus can be withdrawn tax-free under section 10(10)A while the rest of the commuted amount would be taxable in the hands of the annuitant.
b. Immediate Annuity Plan
An immediate annuity plan is when you buy a pension plan later in life, so that as soon as you pay the premium, usually in a lumpsum, your annuity would begin immediately.
Thus, in immediate annuity plans, your pension starts immediately after the policy begins. There is no deferment period in this plan.
- Immediate annuity plans do not have any waiting period for the annuity payments and the payments are made immediately
- In this pension plan, you would be able to choose the frequency of the annuity payment. This frequency can be monthly, quarterly, half-yearly, or yearly
- These are traditional life insurance plans and have a guaranteed rate of the annuity
- The premiums can be payable in the form of a single premium and this premium is also known as the purchase price
Options of Annuity available to an annuitant
In addition to these basic categories of annuities, there are some other categories of annuities as well such as
- Life Annuity – In the Life Annuity, you would be obtaining annuity payments throughout your lifetime. The annuity payments would stop in case of your demise.
- Life Annuity with return of purchase price – Here, you would be obtaining annuity pay-outs until you are alive. On your demise, your nominee would receive the purchase price with which the annuity has been purchased.
- Annuity certain – Annuity certain is otherwise known as 'Guaranteed Annuity'. In this case, the annuity pay-outs are made for a guaranteed period such as 5 years, 10 years, 15 years, or 20 years. After the end of the guaranteed period, if you are alive then you would receive the pay-outs for your lifetime. In case of your demise during the pay-out period, the annuity pay-outs will not stop. The annuity pay-outs would continue till the end of the guaranteed period and then stop.
- Increasing annuity – In this case, the annuity pay-out would keep on increasing every year or keep on increasing in every frequency by a fixed rate. This rate maybe 5% or 10% and the increase can be either at a simple rate of interest or compound rate.
- Joint Life annuity – Here a married couple would be covered for the receipt of the annuity pay-outs. If you are purchasing the annuity, then you are the primary annuitant whereas your spouse is the secondary annuitant. The annuity pay-out would not stop in case of your demise and would continue until your spouse is alive. However, if your spouse dies earlier then the annuity pay-outs would be made until your lifetime.
- Joint Life annuity with the return of purchase price – Here the annuity pay-out is made until the lifetime of the last surviving annuitant. Also, the purchase price of the annuity is refunded back in case the last annuitant’s demise.
2. Unit Linked Pension Plans
- In Unit Linked Pension Plans, the investment is in the form of a combination of stocks, bonds, and securities
- They help in creating a corpus which would help in funding your post-retirement necessities
- Under the Unit Linked Pension Plans, the fund which is created would be utilized in the payment of annuities which are a source of regular income after retirement
- In Unit Linked Pension Plans, with the maturity of the plan, you would get an option of commuting one-third of the fund value in the form of cash. This is known as the commutation of pension and this is not taxable under section 10(10)A. The remaining value can be taken in the form of annuity instalments
- In case of your death during the policy term, the death benefit is paid which is highest among the fund value or the sum assured. Your nominee would have the option to choose to obtain the death benefit in the form of a lump sum or annuity pay-outs.
- After the completion of the first five policy years, you are eligible to withdraw a portion of your fund value. This is known as Partial Withdrawal. However, there is a limit on the minimum and maximum amount for the partial withdrawal.
- With the help of top-ups, an additional premium can be invested into the Unit Linked Pension Plans. This would help in increasing the sum assured of the Pension plans; however, this is feasible in some Unit Linked Pension Plans only.
Pension plan with or without cover
- The full sum assured would be offered in case of your demise if you have purchased a pension plan with an inbuilt life insurance cover.
- If your pension plan does not have a cover and if your death occurs during the accumulation phase of the pension plan, then your nominees would only receive the corpus that has been built till date along with the interest as decided by the insurance provider.
3. Employer’s Pension Plans
Employer’s or Work-based pension plans are usually set up by your employers to help you to save for your retirement. In this type of pension plan, you and your employer would contribute every month to the fund. Your contribution would be directly deducted from your salary.
Mainly, there are three types of Employers’ pension plans in India
a. Defined Benefit Plan
In this type of work-based pension plan, the pension would be calculated on certain factors like your salary and how many years of service are left. So, you would be aware of the pension amount beforehand. The major examples of the Defined benefit pension plan are the Central Civil Services Pension and Public Sector Bank Pension.
b. Defined Contribution or Money Purchase Plan
The pension amount in this plan is calculated by the contributions made by you and your employer each month and also on the performance of the different investments that have been made by that money. The decision related to the allocation of the funds to equity or debts can be taken by those contributing to the plan. You would not be aware of the amount you would receive as retirement benefit beforehand. Provident funds are the best examples of the Defined Contribution Pension plan.
c. Hybrid Plan
The Hybrid Pension plan is a combination of the Defined Benefit and the Defined Contribution pension plans.
Some tips to remember before purchasing pension plans
- You must estimate your long-term or future financial goals and start investing early into retirement planning
- You should consider your current income and then fix an amount that you must invest in your retirement plans
- You must do proper research about the pension plans, understand the product, and then decide on investment
- You should not consider investing in a pension plan only due to the tax benefits offered
Conclusion
So, pension plans will act as a very good reward during your old age as they help you to have an organized income plan structure when you are not capable of earning much. The different categories of pension plans mentioned above will help you in having a clear understanding of which plan to opt for as per your requirements.
