How Does a Pension Plan Work in India?

Pension plans are one of the best investments to secure the golden years of life. However, before investing an amount for a financially stable future, it is vital to understand how a pension plan works in India. 

We have curated this blog to help you understand the workings, along with a list of different retirement plans, in case you are looking to buy one. 

What is a Pension Plan?

With the rise in the cost of living, your future savings might be insufficient to cover the expenses of old age. So, pension plans offer a safety net for a secure future and support you during your  retirement period. By investing a certain amount on a regular basis, you will receive a steady flow of funds once you retire. 

How Does A Pension Plan Work?  

Pension plans in India work in two phases- 

• Accumulation Phase

The phase where you regularly pay premiums of the pension fund until they attain an age of retirement. 

• Distribution/Vesting Phase

In this phase, you will start receiving a steady flow of income once you retire from the pension plan. 

Types of Pension Plans

Below is the list of different pension plans in India. 

• Deferred Annuity Plans

A deferred annuity plan allows individuals to invest through a single premium or regular premiums regularly over a period of time and enables the accumulation of a corpus. Once the retirement period starts, you’ll start receiving regular payouts. The best part is that your investments are not taxed until withdrawal.  

• Immediate Annuity Plan

Immediate annuity plans require a lump sum investment, and one can receive the pension just after depositing the amount. You can select the investment amount and annuity options as per your requirements. The annuity payments you receive come with taxes, whereas the investment amount is tax-free.

• Pension Plans With and Without Life Cover

Pension plans with life cover combine retirement savings with a life insurance component. These plans provide financial security for the insured family in case of their untimely demise. 

Pension plans without life cover do not provide this benefit. If the policyholder dies, the nominee will get only the premium amount that is paid till the death of the life assured. However, these plans offer higher returns since the entire premium is invested.

• National Pension Scheme (NPS) 

Introduced by the government, this National Pension Scheme helps Indian citizens build a financially stable future. As per the individual’s preference, the savings get invested in the debt and equity markets. Once the policy matures, 60% of the funds can be withdrawn immediately, and the remaining 40% can be used to buy an annuity plan. The immediate withdrawal, i.e., 60%, is tax-free, while the annuity payments are taxed according to your tax slab.

• Pension Funds 

It is a long-term investment where six authorized companies operate as fund managers. These are regulated by the government body under the Pension Fund Regulatory and Development Authority (PFRDA). 

• Guaranteed Period Annuity

Guaranteed Period Annuity guarantees payments for a certain period, regardless of whether the annuitant is alive or not. If the annuitant passes away during the guaranteed period, the annuity payments will be given to the nominee. 

• Life Annuity

Under this type, you receive the annuities for the lifetime, and if the annuitant dies, the nominee will receive payments. 

• Annuity Certain

"Annuity Certain" or "Certain Annuity" is a type of annuity plan that guarantees payments to the annuitant for a specific number of years, regardless of how long they live. In case of death, the beneficiary receives the death benefit.

Features of Pension Plans In India

Below are some of the key features of pension plans that make them a worthwhile investment. 

• Tax Benefits

The policyholder can avail of tax benefits under section 80C of the Income Tax Act 1961. The returns you receive might be tax-free depending on the type of pension plan. In addition, deductions under VI-A of Section 80C, Section 80CCC, and Section 80CCD of the IT Act 1961 also be availed as per certain terms and conditions. 

• Guaranteed Death Benefit

In case of the policyholder’s death during the policy tenure, the nominee gets the death benefit of 105% of the total premium paid. (Death benefits may vary according to the chosen pension plan)

• Flexible Payouts

Best pension plans in India enable the insured to select how they would like to receive the benefit. Depending upon the requirements, one can decide whether to receive monthly or annual payments. 

• Retirement Benefits

Pension plans provide a steady stream of income post-retirement and allow you to build a retirement corpus. This way, you can live the golden years of your life peacefully. 

• Policy Discontinuation 

You can surrender or discontinue the policy if you are unable to pay the premiums of an active pension plan due to any specific circumstances. The best part is that the policyholder will also get the surrender benefits. It is worth remembering that different policies offer different surrender benefits and timelines. So, make sure to check the “surrender benefit” beforehand. 

The Bottom Line

In a nutshell, pension plans offer several benefits in the second innings of life. With the use of government plans, long-term investment strategies, and private plans, one can secure the post-retirement period, ensuring a comfortable life ahead. 

Best Pension Plans In India

Below is a list of some of the best pension plans in India. 

Frequently Asked Questions (FAQs)   

Ques 1. How do pension plans work in India?

Ans. Pension plans involve paying regular premiums by individuals over a specific period of time. These contributions are invested in various stocks and bonds. Upon retirement, the accumulated corpus is used to purchase an annuity plan, which provides regular payouts.

Ques 2. How much can one invest in a pension plan? 

Ans. The amount of investment depends completely on personal things like the cost of living, needs of financial dependents, etc. 

Ques 3. What is the accumulation phase in a pension plan? 

Ans. It is a phase where individuals regularly pay premiums of the pension fund until they attain an age of retirement. 

Ques 4. Does the pension plan offer tax benefits? 

Ans. Yes! The pension plan offers tax benefits under section 80C of the Income Tax Act 1961. 

Ques 5. What are the benefits of having a pension plan with life cover?

Ans. A pension plan with life cover offers the dual benefits of retirement savings and life insurance. If the policyholder passes away during the accumulation phase, the nominee receives a death benefit.