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Pension Information - What Is Pension And What To Do To Avail It - HDFC Life

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Pension Information - What Is Pension And What To Do To Avail It
March 16, 2023

After retirement, when a person no longer has a regular monthly paycheck to support her/his family and savings dwindle, the one thing that can ensure that no financial burdens are forthcoming is the incoming pension. Pension is a fund that a person builds up by regular contribution throughout her/his career so that after retirement, a regular income can be ensured out of that fund. A pension can either be a defined benefit plan i.e. when a fixed amount is paid regularly or a defined contribution plan in which a fixed sum is invested initially and after retirement becomes ready to be withdrawn. Whether taken as a lump sum benefit or in the form of fixed installments (usually on a monthly basis), the choice of disbursement depends on individual preferences or laid down rules and regulations.

Based on the modes of payment after retirement, pension plans are of two broad types. A traditional benefit plan and distribution plans. In the traditional defined benefit plans, the benefit on retirement is determined by a set formula, rather than depending on investment returns. The plans offered by the government for the benefits of retired people come under the purview of defined benefit plans. In this case, the benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors. In this case, the responsibility of the corpus at the time of retirement of an employee is framed and administered by the company or the trust-body under existing laws and by-laws.

On the other hand, a defined distribution retirement and pension plan lays emphasis on the employee for maintaining and building up the corpus at the time of retirement. A defined contribution plan will provide a payout at retirement that is dependent upon the amount of money contributed and the performance of the investment vehicles utilized. Hence, with a defined contribution plan the risk and responsibility lies with the employee that the funding will be sufficient through retirement. Traditional defined benefit plan designs (because of their typically flat accrual rate and the decreasing time for interest discounting as people get closer to retirement age) tend to exhibit a J-shaped accrual pattern of benefits, where the present value of benefits grows quite slowly early in an employee's career and accelerates significantly in mid-career: in other words it costs more to fund the pension for older employees than for younger ones (an "age bias"). Defined benefit pensions tend to be less portable and allow for limited flexibility when compared with defined contribution plans, even if the plan allows a lump sum cash benefit at termination. Most plans, however, pay their benefits as an annuity, so retirees do not bear the risk of low investment returns on contributions or of outliving their retirement income.

In India, there is a range of options for building up the pension fund. Some among these are as follow:

  1. National Pension Scheme (NPS)
  2. Public Provident Fund (PPF)
  3. Employees Provident Fund (EPF)
  4. Pension plans offered by insurers like Bajaj Allianz Retire Rich, Aegon Life Guaranteed Income plan, HDFC Life Click 2 Retire plan etc.

HDFC Life offers HDFC Life Assured Pension plan, a unit linked pension plan that offers market linked benefits with loyalty additions. This plan has been formulated to ensure that a regular income never ceases for you so that you can enjoy your golden years without any financial woes. For details, click on the mentioned link: https://www.hdfclife.com/retirement-and-pension-plans/assured-pension-plan.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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