Simply put, pension plans or retirement plans are offered by insurance companies to help individuals build a retirement corpus. On maturity this corpus is invested for generating a regular income stream, which is referred to as pension or annuity. Pension plans are distinct from life insurance
plans, which are taken to cover risk in case of an unfortunate event.
‘With cover’ and ‘without cover’ plans
Pension plans are also classified as ‘with cover’ and without cover’ plans. The ‘with cover’ pension plans offer an assured life cover (i.e. sum assured) in case of an eventuality.
Under the ‘without cover’ pension plan, the corpus built till date (net of deductions like expenses and premiums unpaid) is given out to the nominees in case of an eventuality. There is no sum assured in this case.
‘Immediate annuity’ plans and ‘Deferred annuity’ plans
In case of immediate annuity plans, the annuity/pension commences within one year of having paid the premium (which is usually a one-time premium).
The premium paid for the immediate annuity policy is also known as the purchase price.
In case of deferred annuity, the annuity/pension does not commence immediately; it is ‘deferred’ up to a time, which is decided upon by the policyholder.
Deferred annuity premiums can be paid as a ‘single premium’ or as regular premium. Presently, most pension plans available are deferred annuity plans.
Options available to individuals on pension plans
1. Lifetime annuity without return of purchase price: Under this option, the individual receives pension for as long as he lives. The pension ceases on occurrence of an eventuality and the insurance contract comes to an end.
2. Annuity for life with a return of the purchase price: If this option is exercised, the individual receives pension till he is alive. In the event of an eventuality, the purchase price of the annuity is paid out to his nominees/beneficiaries. Purchase price here means the maturity amount, which includes the basic sum assured plus the bonuses/additions, if any.
3. Lifetime annuity guaranteed for a certain number of years: Under this option, the individual receives a pension for a certain number of years irrespective of whether he is alive for the said period or not. A major positive of this option is that, if he survives the period, he continues to receive pension for the rest of his life.
4. Joint life/ Last survivor annuity: The individual receives a pension till he is alive. In case of an eventuality, his spouse receives the pension.
Premium paid up to Rs 100,000 per annum is eligible for deduction under Section 80C in case of insurance plans. However, the deduction under Section 80CCC falls under the overall limit of Rs 100,000. On the maturity, up to one third of the maturity amount, which can be withdrawn in all options as mentioned above is treated as tax free in the hands of individual. The pension, from the remaining two-thirds amount, is taxed according to the marginal rate of tax.