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Types of Pension Plans In India

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Types of Pension Plans in India
August 16, 2024

Table of Content

 

Pension plans, also referred as retirement plans, are a form of investment plan in which you can invest a part of your savings in order to accumulate a significant sum over a period of time. This money ultimately helps you financially after retirement. 

By financially planning for your post-retirement life, you enable yourself to live worry-free in your golden years, without compromising on your standard of living. However, saving a big amount for your retirement may not be enough, as you are likely to one day run out of that money, whether gradually or suddenly, due to some emergencies. That is why investing continuously in a pension plan can provide you with a significant amount, thanks to the power of compounding. Now, it is up to you whether you wish to receive that amount as a lump sum or as a monthly pension.

Financial independence post-retirement is paramount. Prudent investments made while you have a regular income can make the golden years of your life enjoyable. With financial freedom it is possible to do things one is passionate about, spending time with loved ones without the worry of finances. Read on for the various types of pension plans in India and choose the pension plan to suit your financial and retirement goals and needs.

What Are Pension Plans?

Pension plans are a part of retirement planning that provides the benefit of life cover as well as investment. It not only makes your retired life financially independent but also will be a financial safety net for your family in your absence. 

The post-retirement financial needs differ from individual to individual, and so does the financial planning. It depends on the lifestyle, number of dependents, and financial goals. Various types of pension plans are designed to suit different requirements. You can choose a pension plan that meets your needs and can be adjusted as per your financial goals.

Types of Pension Plans in India

1. Deferred Annuity

This is a life insurance plan that provides a fixed income at a future date of your choice. This is one of the retirement plans best suited for salaried individuals as it has flexible premium payment options. If you have a lump-sum amount, you can pay a single premium and get a fixed income after a waiting period, i.e., the deferment period. This is one of the most popular types of retirement plan. The premiums paid under the plan are eligible for tax benefits under Section 80C.

2. Immediate Annuity

Immediate Annuity is one of the basic annuity plans. Among the types of pension plans, this plan suits individuals who can invest a lump-sum amount for a fixed post-retirement income.The contribution made is converted into a guaranteed stream of income for a minimum period of 5 years or a lifetime. The withdrawals begin one year after the date of investing in the plan.

If you have already paid tax on the funds invested in the immediate annuity plan, the fixed income generated will be partially tax-free.

3. National Pension Scheme (NPS)

The National Pension System (NPS) is a government-backed retirement savings scheme available to Indian citizens, including NRIs. This market-linked, voluntary investment scheme allows you to build a substantial retirement corpus by contributing to a pension account during your working years. Introduced by the central government on 1st January 2004, NPS provides the flexibility to choose from a variety of investment options managed by professional fund managers. This flexibility and government support make NPS a reliable option for individuals planning for retirement, including those considering a pension plan for NRI.

4. Public Provident Fund (PPF)

This is among the types of pension plans that are most preferred due to their investor-friendly features. It is a long-term investment plan with a tenure of 15 years. The option of either making a lump sum deposit or creating a maximum of 12 instalments in a financial year is available. The minimum deposit is Rs. 500/- and the maximum is Rs. 1.50 lacs in a financial year. Public Provident Fund is a government-backed investment option, and individuals with low-risk appetite consider this to be one of the ideal types of retirement plan. PPF provides EEE tax benefits, which means the principal, interest, and maturity proceeds are all tax-free. The pension fund can be extended for a further period of 5 years on maturity. A loan facility is available from the 3rd year till the 6th year from the date of opening the account.

5. Atal Pension Yojana

Atal Pension Yojana is one of the unique types of pension plans designed mainly for the unorganised sector. Under this yojana, a guaranteed pension of Rs. 1000 to Rs. 5000, depending on the contribution, will be provided to the subscriber every month upon attaining 60 years of age. 

6. Employee Provident Fund (EPF)

The EPF (Employee Provident Fund) scheme allows organized sector employees to receive a pension once they retire after the age of 58. However, an employee can claim the scheme's benefits only if he/she has served for at least years, continuously or not. 

Both the employer as well as the employee need to contribute 12% each of the employee’s pay towards the EPF scheme. But, while the entire share of employee’s contribution goes towards EPF, 8.33% of the employer’s contribution goes towards EPS (Employees’ Pension Scheme, and the remaining 3.67% goes towards EPF contribution per month.

7. Retirement-Focused Mutual Fund Schemes

Apart from the types of pension plans with a fixed income, individuals can explore retirement-focused mutual fund schemes that provide both liquidity and tax benefits. Individuals with a risk appetite can invest in these mutual funds as they provide market-linked returns. The lock-in period depends on the scheme you decide to invest in. 

8. Annuity Plans

Individuals who intend guaranteed returns post-retirement, along with a financial safety net for their family, will opt for annuity plans and other types of pension plans. Various options like a single annuity, joint annuity and an annuity with returns of purchase price are available to suit individual preferences. Flexibility to pay a regular premium or a single premium is also offered. 

The choice of receiving monthly, quarterly, half-yearly, or yearly income is also provided. Invest in annuity plans that are considered the best types of retirement plan for a guaranteed income for a lifetime.  The premiums paid are eligible for tax benefits under 80C. However, the annuity income is taxable as per your income tax slab.

9. Pension Plans With Life Cover

The most preferred types of pension plans are plans with life cover. These plans involve two components, i.e., the investment component and the insurance component. A part of the premium is invested in the market, and the rest goes towards life cover. The primary object of these types of pension funds is to provide a sustainable pension to cover the monthly expenses on retirement. They also serve as a financial safety net for the family in case of the demise of the policyholder during the policy term.

10. Pension Funds

Pension funds are like financial tools that help you accumulate funds for your post-retirement period. By investing a particular amount regularly into your pension fund, you can gradually build up a significant retirement corpus. The key functions of a pension fund are to accumulate and invest your money and manage the pension corpus through various schemes.

11. Life Annuity

Annuity is referred to as a form of investment option wherein you make a lump sum payment to the insurer, and in return, they give you a payout at pre-decided time intervals or immediately, as per your financial requirements. The payout provided by annuities acts as an income stream for you after retirement. 

In case you opt for a life annuity plan, you receive a pension amount till you are alive. If you have also included your spouse in the plan, he or she would continue to receive the annuity even after your demise, which is why it considered amongst the ways to secure your spouse’s financial future, especially if they were dependent on you.

12. Guaranteed Period Annuity

As its name suggests, a guaranteed period annuity policy acts as a financial instrument that provides consistent as well as predetermined payments to you, for a specified duration, such as 10 or 20 years. These payments are guaranteed,  irrespective of any market volatility or changes in rate of interest. This form of annuity turns out to be suitable for those seeking a continuous and reliable source of retirement income.

13. Whole life ULIPs (Unit Linked Insurance Plans)

Whole life ULIPs offer a combination of life insurance and investment benefits aimed to serve those seeking long-term financial security through both insurance and investment. Whole life ULIPs provide a guaranteed cover throughout your life (usually up to the age of as high as 99 or even 100. This ensures your loved ones are financially protected if you untimely die. The premium paid towards whole life ULIP secures your life and also helps you to grow your wealth through investment in market linked products, such as equity, debt or both.

Types of Pension Plans by HDFC Life Insurance

  • HDFC Life Systematic Pension Plan

Under this plan, the policyholder pays the premium systematically for a limited term (5 years to 40 years) and gets guaranteed income for the whole life. There is also the option to defer annuity payouts by choosing the deferment period, or you can opt to receive annuity either monthly, yearly, quarterly or half-yearly. This pension plan by HDFC Life also offers the 'return of total premiums', payable upon the policyholder's death.

Moreover, this plan provides the flexibility to choose your premium payment frequency, whether you want to give it entirely in one lump sum payment or over a period of time at your financial convenience. Investors of this plan also get a bonus declared with an assurance of 4% returns on vesting.

  • HDFC Life Personal Pension Plus

This pension plan by HDFC Life is suitable for you if you wish to have a secure and sturdy retirement income, as well as a significant corpus for post-retirement goals such as children's marriage, foreign vacation, etc. Under this policy, you can select an investment tenure from 10 years to 40 years and even choose your vesting age as per your retirement plans. This plan provides an assured benefit of 101% of the total amount of premiums paid. The amount is paid either on your death or upon the policy's maturity. Moreover, you also get to participate and get a share of the company's profits through terminal or reversionary bonuses, if declared. As far as premium payments are concerned, they can be made monthly, half yearly, annually, or quarterly.

  • HDFC Life Smart Pension Plan

Another pension plan by HDFC Life that smartly ensures that you get a regular income and also lead a financially independent post retirement life, is this. This policy offers the choice to avail automatic asset re-balancing and systematic transfer strategies to secure your wealth against market’s ups and downs.

Under this plan, the life insurance cover goes upto 105% of total premium amount paid, including any top-up premium. This policy is suitable to build a retirement corpus, and also offers the flexibility to alter both vesting date as well as premium payment tenure. There are also loyalty additions included into the fund from the 10th policy anniversary.

Who Should Consider Buying Pension Plans?  

All individuals should consider buying a pension plan to financially secure their post retirement life. Whether you are in your 20s, 30s or 40s, you can opt for a pension plan. Pension plans also offer up to Rs 1.5 lakh income tax benefits under Section 80C. By having pension plans in place, you can focus on other life goals like building a house, owning a car, and a child's education. The pension plan would, in the meantime, take care of your post retirement income.

How To Choose The Best Pension Plan?

With different types of pension plans available, it can be overwhelming when it comes to choosing the best plan. Keep in mind the following aspects while investing in a pension plan:

  1. Consider your financial goals, decide your retirement age, and assess the monthly income you need after retirement.

  2. Your present income and the fixed income you need after retirement are the factors that decide the investment required.

  3. Do market research and go for a plan that aligns with your financial goals and affordability.

  4. Read the terms and conditions to understand if the plan suits your requirements.

  5. Do not go by recommendations from others. Your financial goals are different from theirs.

Things To Consider While Buying A Pension Plan

1. Annuity Period And Conditions

Given that annuity is a key feature of pension plans, it is crucial to carefully select the payout option. You can select an immediate annuity if you have recently retired and need to invest the lump sum money to kick start your pension income. On the other hand, you can go for a deferred annuity if you are fine with your pension starting after some years. When zeroing in on any annuity plan, factor in the annuity payout options and the premium being charged for the same.

2. Sum Assured

There are a lot of types of pension plans that offer a sum assured, which could vary widely across different insurers. The sum assured could be 10 or 15 times your annual premium cost or equal to the fund value of the chosen policy. When opting for any pension plan, first check if the sum assured being offered to you is enough to secure you and your family's future and also aligns with your goals.

3. Accumulation Period

This refers to the period during which you keep paying your premium. It usually ends before you retire. So, if your current age is 35 and you wish to retire at the age of 55, then choose a pension plan wherein the accumulation period is either 20 years or less.

4. Premium Payment Period

Different pension plans offer different payment periods. Ultimately, the time at which the annuity begins and the duration for which it shall continue should align with your goals.

5. Surrender Value

This amount refers to the money an insurer shall pay you in case you opt to surrender your policy before the maturity. However, a minimum number of premiums such as 6 or 10 premiums should have been paid by that time. Upon surrendering your pension plan, you would lose all the associated benefits of the policy.

How Much Should You Invest In A Pension Plan?

Your investment in any of the different types of pension plans in India depends on what you are investing in. If you are investing for a fixed income after retirement, consider the following:

  • Your Age

  • The type of annuity plan

  • The term of the annuity plan

  • Life cover

  • Insurance Riders

If you are investing for a retirement corpus, then consider the following:

  • Starting Age

  • Type of Plan

  • Life Cover amount

  • Maturity Age

  • Tax saving limits

Select the Right Type of Pension Plan After Understanding Your Investment Needs

Planning your retirement life judiciously can do wonders to your golden years. Besides peace of mind,  the right type of pension plan can adequately take care of your post retirement expenses and ensure your standard of living does not go down. When choosing a pension plan, be aware of the various types of pension plans available, understand their purpose, and then choose the plan which suits your financial goals the most.

How Different Pension Plans Impact Your Investment Amount?

Different types of pension plans require different investment amounts and have varying limits. While PPF has up to Rs 1. lakh limit per year, ULIP plans of up to Rs 2.5 lakhs do not qualify for tax-free maturity. As far as NPS is concerned, you can invest any amount, but tax saving is possible up to Rs 2 lakhs per year only. Also, while ULIPs offer investment in equity funds, PPF offers a fixed rate of return.

FAQs on Types of Pension Plans

Q: What is a pension plan?

Pensions plans are a form of investment plan that financially helps in creating retirement corpuses. It offers a pre-specified as well as regular pension, thus preventing any financial difficulties in your post-retirement years. They ensure financial stability by providing a reliable income source throughout your retirement period.

Q: Which is the best type of pension plan in India? 

The choice of pension plan, whether it is annuities, NPS, PPF, EPF, etc., should depend on factors such as your retirement age, income, financial goals, life coverage, pension facility, etc. 

Q: What are the main types of pension plans available in India? 

Life annuity, deferred annuity, immediate annuity, NPS, PPF and EPF are among the main types of pension plans in India.

Q: Which plan is best for pension?

The choice of best pension plan, whether it is annuities, NPS, PPF, EPF, etc should ideally be decided after factoring in aspects such as your retirement age, income, financial goals, life cover, pension facility, etc.

Q: What is annuity in a pension plan?

An annuity is a formal contract between you and an insurer in which you make a lump sum payment to the company and in return, they give you a payout at pre-decided time intervals or even immediately, as per your financial requirement. The payout provided by annuities acts as an income stream for you after retirement.

Q: Why do you need pension plans?

By investing a particular amount towards your pension plan regularly, you can accumulate a significant sum that would act as a safety net and steady income inflow for your post retirement life.

Q: What is the best time to invest in a pension plan?

The right time to invest in a pension plan, is as soon as possible, such as in your 20s or 30s. By having pension plans already in place, you can focus on other life goals like building a house, owning a car, and child’s education. The pension plan would meanwhile take care of your post retirement income.

Q: How is the pension plan different from the term plan?

Pension plans are a form of investment that financially helps in creating retirement corpuses and provides pension income during your golden years. To better plan for your retirement, you can use a pension calculator to estimate how much you need to save for a comfortable future. On the other hand, a term life insurance plan offers a cover amount to financially secure your family’s future if you untimely die during the policy tenure. That sum acts as a replacement income to help your family manage household expenses, loan EMIs, investments, etc., in your absence.

Q. Which are the 3 pension plans that are generally preferred?

Defined contribution pension plans like EPF, PPF, and NPS are 3 most preferred types of pension plans in India.

Q. Which is the best pension scheme?

The grading of the pension scheme depends on each one’s financial goals. However, for salaried individuals, defined contribution pensions like EPF, PPF, and NPS are the best.

Q. What are the four main pension plans available in India?

The main types of pension plans in India are:

  • Deferred Annuity

  • Immediate Annuity

  • Life Annuity

  • Pension Plan with Life Cover

Q. Are pension plans eligible for tax benefits?

The contributions made towards most pension plans are eligible for tax benefits under Section 80C of the Income Tax Act 1961.

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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 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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