Pension plans are annuity plans which are designed to create a steady flow of income after retirement. Annuities are a series of regular incomes which are paid throughout the lifetime of an individual. Pension plans help policyholders to build up a retirement corpus from which annuity payments are made. Pension plans are different from other life insurance plans as they pay the maturity proceeds in the form of annuities and not in a lump sum.
There are two types of pension plans available in India. They are as follows:
Under deferred pension plans, the payment of the annuity is deferred up to a certain period. In these plans, the policyholder firsts build up a corpus by paying premiums. The term of the plan is called the deferment period as the annuity is not paid during that period. After the term of the plan is over, the deferment period is over. Thereafter, the policyholder receives annuity pay-outs for his whole life.
Under immediate annuity plans, annuity pay-outs start immediately after a lump sum corpus is paid to the insurance company. Under these plans, the policyholder pays a single premium to the company. Thereafter, the company pays annuity pay-outs immediately from the next month, quarter, half-year or year as chosen by the policyholder.
The important features of pension plans include the following:
To choose the best pension plans, individuals should look out for the following parameters:
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Some of the best pension plans available in the market include the following:
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Premiums paid are exempted under Section 80CCC which, together with Section 80C, has a maximum deduction limit of Rs.1.5 lakhs.
No, in the case of a death benefit, the mode of payment would be as chosen by the nominee. The nominee can choose the take the death benefit either in the lump sum or in annuity installments.
Some deferred pension plans, which are offered as traditional plans, take part in bonus declarations. It depends on the plan offered.
Commutation of pension is applicable under deferred annuity plans where 1/3rd of the vesting benefit is allowed to be withdrawn in cash. The cash withdrawal is called commutation of pension and it is tax-free.
Yes, the annuity which the annuitant receives is treated as a taxable income in his/her hand.
Annuities can be received monthly, quarterly, half-yearly or annually. The annuitant can choose any mode as per his/her suitability.
Joint life annuities are annuities which are paid throughout the lifetime of both the annuitant and his/her spouse.
The individual on whose life the pension plan is taken is called the primary annuitant. Annuities are paid throughout the lifetime of the primary annuitant. After the death of the primary annuitant, if the spouse is alive, annuity payment would not stop. They would continue until the lifetime of the spouse. The spouse would be called the secondary annuitant.
Yes, many insurance companies allow unit-linked pension plans as well as traditional pension plans.
No, pension plans mandate the maturity benefit to be paid in annuity installments. Only 1/3rd of the corpus can be taken in a lump sum. From the remaining part, annuities should be paid.
Yes, on maturity, many deferred annuity plans allow the policyholder to defer the annuity payouts.
Under immediate annuity plans, annuity payments are made till the annuitant’s lifetime. If the return of purchase price option is selected, the lump sum amount used to buy the immediate annuity plan is returned back when the annuitant dies.