5 Key Facts About Pension Plans in India

Pension plans are one of the best ways people can plan for their retirement. Investing in a pension plan in the early years of life is highly advised. Experts suggest that one must start investing in pension plans as soon as they start earning so that they can save a significant amount without facing any struggle. If you too are considering investing in a pension plan in India, know that there are a few things you must be aware of. 

5 Key Facts About Pension Plans in India

The list includes:

• There are 2 phases of pension plans in India 

Accumulation phase and vesting phase are the two phases of pension plans in India. The investor pays annual premiums until they reach their retirement age in the accumulation phase, while the vesting phase begins when the investor reaches their retirement age. During the vesting phase, the retiree is slowly distributed their retirement corpus in the form of annuity. The annuities are paid to the investor until their death or the death of the nominee.

• Withdrawal of the entire retirement corpus in one go at retirement is not allowed

On retirement, an individual is not allowed to withdraw the entire accumulated retirement corpus. They can only withdraw one-third of the accumulated corpus, while receiving the rest in the form of annuity. 

• Annuities are taxable

Contributions made towards pension plans are exempted for tax under section 80CCC upto a maximum limit of Rs. 1 Lakh. It must be noted that the withdrawals are not tax free. In simple words, the one-third corpus withdrawn is tax free, while the remaining distributed in the form of annuities is taxable.

• Pension plans only guarantee positive returns

Pension plans in India do not guarantee a fixed return on their retirement savings. In fact, even the best pension plans only guarantee a positive return on the investment. 

• Freedom to choose from a  variety of pension plans

There are different types of pension plans that you will find during your online hunt for a pension plan. While the traditional pension plans sponsored by an insurance company invest purely in debt, unit linked pension plans invest in both equity and debt. The investor can choose the investment mix as per their needs. Pension plans sponsored by government-approved mutual funds feature a balanced investment approach. They follow investment in both equity and debt in a 40:60 proportion. The third option is the NPS or National Pension Scheme. It must be noted that the National Pension Scheme can invest in either equities, government securities or debt other than government securities. 

Final Words

Now that you know what to expect with pension plans, make sure you keep the above mentioned points in mind before actually making the final decision.   

Also read: 

Pros And Cons of Pension Plans in India

Top Reasons to Save For Retirement Now

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.