Updated on 15 June 2023
Pension plans help in ensuring financial security during the golden years of one’s life. They offer a steady income after retirement, enabling individuals to maintain their standard of living. However, there’s often a lingering question that arises: Do pension plans in India allow any death benefits?
Key Takeaways
- Pension plans provide individuals with regular income during retirement, supplementing other retirement savings.
- There are two main types of pension plans: defined benefit plans and defined contribution plans.
- These plans offer benefits such as retirement income, employer contributions, tax advantages, spousal benefits, and death benefits.
- Death benefits in pension plans can vary depending on the type of plan.
With pension plans, you embark on a journey towards financial security, guided by the invisible hands of compound interest and wise investment decisions. As you navigate through the complicated pathways of retirement planning, every rupee contributed is like a drop of water filling the pitcher. With each passing day, your contributions morph into tiny wins that further lead to milestones backing up your financial security.
In this blog, we will discuss the intriguing aspects of pension plans and unravel the truth behind their death benefits in India.
What is a Pension Plan?
Pension plans are essentially financial products designed to provide individuals with regular income post-retirement. They serve as a supplement to other retirement savings, such as Employee Provident Fund (EPF) or the National Pension Scheme (NPS).
Pension plans can be broadly classified into two types: defined benefits and defined contribution plans. In defined benefit plans, the retirement benefit is predetermined and based on factors like salary, years of service, and age. On the other hand, defined contribution plans accumulate a corpus through regular contributions, which is then utilized to provide retirement benefits.
Also Read: What are retirement pension plans?
Benefits of Pension Plans
Pension plans offer several benefits to individuals, providing them with financial security during retirement. Here are some key advantages of pension plans:
Retirement Income
Pension plans are devised to provide a steady stream of income during retirement. They ensure that individuals have a regular source of funds to cover living expenses after they stop working.
Employer Contributions
Many pension plans are sponsored by employers, who contribute to the plan on behalf of their employees. This means that individuals can accumulate retirement savings with the help of their employer’s contributions in addition to their own savings.
Tax Advantages
Pension plans often come with tax benefits. Contributions made to the plan are typically tax-deductible, which means that individuals can reduce their taxable income in the year they make contributions. In some cases, the growth of the pension fund is also tax-deferred, allowing the investments to grow without immediate tax consequences.
Spousal Benefits
Many pension plans offer spousal benefits, ensuring that the surviving spouse continues to receive a portion of the pension payments in the event of the pensioner’s death. This feature provides financial protection for the surviving spouse and helps maintain their standard of living.
Death Benefits in Pension Plans
Apart from the above-mentioned benefits, one of the most luring advantages of pension plans is death benefits. This can help the surviving spouse or nominee to deal with challenging financial situations such as paying off hefty loans. The specific details of death benefits in pension plans can change depending on the type of plan and the terms and conditions set by the plan sponsor or administrator.
Let us look at the different types of plans and death benefits under them.
Defined Benefit Plans
Traditionally, defined benefit plans have been the prevalent form of pension plans in India, particularly in the public sector. These plans often offer death benefits to the surviving spouse or nominees of the pensioner. The death benefits can be in the form of a pension continuation for the spouse or a lump sum payment to the nominees. The exact provisions may vary across plans and organizations, so it is essential to review the specific terms and conditions of the pension scheme.
Defined Contribution Plans
Defined contribution plans, such as the NPS (National Pension Scheme) and private sector pension plans, typically have different rules regarding death benefits. In the event of the pensioner’s demise, the accumulated corpus in the pension account is generally passed on to the nominees or legal heirs. The nominees have the choice to receive the corpus as a lump sum or convert it into a pension plan in their name.
Did You Know?
While death benefits are available in the market, the exact amount of money and conditions may vary depending on the terms and provisions of the particular pension plan.
How do Death Benefits in Pension Plan Work?
Death benefits in pension plans are an important aspect to consider when planning for retirement and ensuring financial security for loved ones. The working mechanism of death benefits varies depending on the type of pension plan, be it a defined benefit or a defined contribution plan. Let’s delve deeper into how death benefits function in each type of pension plan.
Deferred Annuity
- Basic Feature: A regular premium or one-time premium is charged. The phase in which you pay the premium is called the accumulation phase. After this phase ends, the payout starts. Only the insured is allowed to receive monthly income out of this scheme.
- Death Benefit: Every insurer has different policies. Generally, the monthly payments are discontinued if the annuity is in the pay-out phase.
Immediate Annuity
- Basic Feature: A single premium is charged under this scheme. Your monthly payouts start immediately. You can choose your favorite annuity plan from a range of options.
- Death Benefit: The monthly payments are ceased, and the nominee is entitled to receive the balance corpus if the insured dies within the policy tenure.
Annuity Certain
- Basic Feature: The basic features are the same as a deferred annuity except that the annuity is payable for a certain period.
- Death Benefit: If the insured dies within the policy period, the annuity payments are continued to the nominee.
Guaranteed Period Annuity
- Basic Feature: You can make a regular or one-time payment just like the deferred policy. The period of annuity payouts is predefined. Generally, the guarantee period is in multiples of 5 years.
- Death Benefit: In case the insured dies before the completion of the guarantee period, the annuity is paid to the nominee until the guarantee period expires.
Life Annuity
- Basic Feature: As the name suggests, the monthly payments are linked to the insured’s life. But this plan gives you two options to choose from: With a spouse and without a spouse
- Death Benefit: In the case of ‘With Spouse,’ the spouse of the insured is entitled to receive the monthly payments after the death of the insured. While in the case of ‘Without Spouse’, the annuity payments are ceased after the death of the insured.
Unit-Linked Insurance Plans
- Basic Feature: These are investment options linked to an insurance policy. You have the option to select the fund in which you want to invest your money. At the same time, one portion of the premiums is charged as a mortality fee to provide a life cover.
- Death Benefit: If the insured dies within the policy period, then the sum assured and the invested corpus are paid to the nominee, in the case of regular ULIP. In the case of whole-life ULIPs, the amount stays invested for the entire lifetime of the policyholder. Tax-free partial withdrawal is allowed post-retirement. The nominee receives the remaining corpus after the death of the policyholder.
National Pension Scheme
- Basic Feature: You can view this as a state-owned ULIP scheme. Handled by NSDL (National Securities Depository Limited), you can invest an amount at regular intervals, and this amount remains invested until your retirement. Its purpose is to give stability to you, post-retirement.
- Death Benefit: A lump sum withdrawal of 60% is allowed after retirement, and you can purchase an annuity with the remaining corpus. Unfortunately, if the subscriber passes away before encashing the scheme, the nominee or legal heir can withdraw the entire corpus in a lump sum.
Wrapping Up
While pension plans are primarily designed to provide retirement income, many do offer death benefits that can be immensely valuable to beneficiaries. These benefits can include survivor pensions, lump-sum payments, and continued health benefits for dependents. However, it is essential to note that the availability and extent of death benefits can vary significantly depending on the specific pension plan and its terms.
If you are a pension plan participant, it is crucial to familiarize yourself with the details of your plan and understand the death benefits it offers. Consider reviewing your beneficiary designation regularly to make sure that your loved ones are guarded in the case of your passing.
Remember, seeking professional advice from financial planners or retirement specialists can provide valuable insights tailored to your specific situation. By staying informed and proactive, you can make informed decisions about your pension plan, ensuring that you and your family receive the necessary support throughout your lifetime and beyond.
