InvestorQ : How are the various pension plans classified?
priya Shah made post

How are the various pension plans classified?

Suresh Patil answered.
3 years ago

Pension plans or retirement plans offer an individual the dual benefits of investment and insurance cover. It is the process of investing a certain amount regularly to accumulate into a large corpus over a specific tenure in a phase-by-phase manner. This will ensure a steady flow of monthly pension once the individual retires.

If one begins contributing towards the retirement plan early on, it will help build an impressive corpus. A well-chosen retirement plan can help you rise above inflation, thanks to the power of compounding. The corpus (a combination of investment and gains) in your name by the retiring age can take care of increasing healthcare costs and lifestyle requirements.

Pension funds can be classified as:

a. National Pension Scheme

The Government of India introduced a new National Pension Scheme (NPS) for those who want to build up their pension amount. Under this scheme, one’s savings will be invested in debt and equity market, based on the insured individual’s preference. It allows you to withdraw 60% of the funds at the time of retirement and the remaining 40% is used for the purchase of the annuity. The maturity amount is subject to tax.

b. Deferred Annuity

With the deferred annuity plan, an insured individual can accumulate a corpus through a single premium or regular premiums over the term of the policy. The pension begins once the policy term gets over. This deferred annuity plan has tax benefits wherein no tax is charged on the money invested until the insured individual plans to withdraw it.

This scheme can be bought by either making regular contributions, or by a one-time payment, depending on the insured individual’s comfort. In this manner, the deferred annuity works in favour of the annuitant, depending on whether he/she wants to invest the entire amount at one time or want to invest systematically.

c. Pension Funds

The government body, Pension Fund Regulatory and Development Authority (PFRDA), has authorized six companies to operate as fund managers.

Pension fund regulator PFRDA in 2014 selected a few companies for managing pension funds of non-government employees. These companies are:

1. LIC Pension Fund

2. SBI Pension Fund

3. UTI Retirement

4. Reliance Capital Pension Fund

5. DSP Blackrock

6. ICICI Prudential Pension Funds Management

7. Kotak Mahindra Pension Fund

These companies offer relatively better returns at the time of maturity and remain in force for a substantial amount of time.

d. Immediate Annuity

In this type of scheme, the pension of the insured individual begins right away. As soon as an individual deposits a lump-sum amount, his/her pension starts. This pension amount is based on the amount the policyholder invests. One can choose from a range of annuity options. In accordance with the Income Tax Act of 1961, the premiums of the immediate annuity plans are tax exempt. Post the death of the policyholder, it is the nominee who is entitled to the money.

e. Guaranteed Period Annuity

Regardless of whether the holder survives the duration, this annuity option is given for periods ranging from five years to 10, 15 or 20 years.

f. Pension plans with and without cover

Pension plans with cover include life cover which means that at the time of the policyholder’s death, the family members are paid a lump-sum amount. This amount may not be a very large amount. The without-cover plan as the name suggests, does not have life cover. If the policyholder passes away, the nominee gets the corpus. At present, the immediate annuity plans are without cover, while the deferred plans are with cover.

g. Annuity certain

In this scheme, the annuitant is paid the annuity for a certain number of years. This period can be chosen by the annuitant and in case of their death, the beneficiary receives the annuity.

h. Life annuity

The life annuity scheme pays the annuity amount to the annuitant until the time of death. If the annuitant dies and he/she had chosen the option “with spouse”, the spouse receives the pension amount.