Close
Close

Buy a Life Insurance Plan in a few clicks

Now you can buy life insurance plan online.

Kotak Guaranteed Fortune Builder

A plan that offers guaranteed income for your future goals. Know more

Kotak e-Term

Protect your family's financial future. Know more

Kotak Assured Savings Plan

A plan that offer guaranteed returns and financial protection for your family. Know more

Kotak Guaranteed Savings Plan

A plan that offers long term savings and life cover. Know more

Kotak e-Invest

Insurance and Investment in one plan. Know more

Kotak Lifetime Income Plan

Retirement years are the golden years of life. Know more

Close

Get a Call

Enter your contact details below and we will get in touch with you at the earliest.

  • Select your Query

Thank you

Our representative will get in touch with you at the earliest.

Pension Funds In India – Meaning, Overview, How Do Pension Funds Work, Types, Pension Plan Features and Tax Benefits

Pension plan is an investment cum insurance product where you invest a specific amount throughout your working life. Here are five things you should know about the working of pension plans.

  • Dec 15, 2021
  • 1,698 Views

​Rising life expectancy and inflation have made it necessary for every working professional to start planning their retirement as early as possible. A pension plan is a product exclusively created to provide a regular stream of income after retirement. 

With features like life cover, investment, and steady returns, a pension plan could be an ideal choice for every individual concerned about retirement planning. . But before you start researching and comparing top pension plans in India, it’d be wise first to understand how they work.

Here are 5 things you should know about the working of pension plans

1. What is a Pension Plan?

As the name suggests, a pension plan is an investment cum insurance product where you invest a specific amount throughout your working life. Once you retire, the insurer will then start providing regular payouts as per the terms and conditions of the plan. 

These plans generally come with guaranteed maturity benefit and death benefit. Some of the insurers also offer add-ons or riders. , such as accidental death and permanent disability benefit. 

2.What are Accumulation and Distribution Phases of a Pension Plan?

Every type of pension plan has two stages- accumulation and distribution. The period you pay premiums to the insurer for the selected term is known as the accumulation phase. These funds are invested in the assets you choose.  

Once you retire, you have the option to ask the insurer to start paying you a regular pension or annuity. You can also withdraw 1/3rd of the accumulated amount on retirement and use the rest for purchasing an annuity from the same insurer. This phase is known as the distribution phase. 

3.What is the Vesting Age in Pension Plans?

Another term you should know about before purchasing a pension plan is the vesting age. The vesting age is the age after which you’d like to start receiving an annuity. You can choose from monthly, quarterly, half-yearly, and yearly pension payouts. 

With most insurers, the vesting age is generally 45-50 years. But you do get the option to choose a vesting period of up to 70 years in most cases. It can be higher than 70 years with some insurers. 

4.How are Pension Plans Taxed in India?

With pension plans, you can choose between an immediate annuity and deferred annuity. For instance, if you are already close to your retirement age, you can select an immediate annuity. In these plans, you invest a lump sum amount and start receiving a pension immediately after investing. Here the principal amount is tax-exempt, and the interest is taxed like any ordinary income. 

With a deferred annuity plan, you start making small contributions towards the plan through premium payments (accumulation phase). During this period, the investment grows without any tax deductions. 

5.Can You Surrender or Discontinue a Pension Plan?

Yes, you do have the option to surrender or discontinue a pension plan whenever you like. In the past, people were only allowed to terminate a pension plan after five years from the date of purchase. But this restriction has now been removed. 

  • Surrender within five years

If you surrender a pension plan within five years, the fund’s value on the surrender date will be moved to a discontinuation plan after deduction of some charges. 

Even this discontinued plan will earn interest at 4% p.a. You can withdraw the funds after five years. However, the proceeds from policy surrender can only be used for purchasing an immediate or deferred annuity plan.  

  • Surrender after five years

If you want to surrender the plan after five years, there will be no discontinuation charges, but the proceeds can only be used for purchasing an immediate or deferred annuity. 

Building a Stable Retirement Income with a Pension Plan

While your monthly salary will stop after retirement, expenses will continue to exist. Therefore, a pension plan is an excellent way to receive regular income and be financially independent even after retirement. 

Kotak Life Time Income Plan

Download Brochure

Features

  • 6 Plan Options
  • Tax benefits ^
  • Higher annuity rates for higher purchase price
  • 4 Annuity Modes

Ref. No. KLI/23-24/E-BB/1052

T&C

- A Consumer Education Initiative series by Kotak Life

Similar Articles

How to Register An EPF Grievance Online

5 Best Investment Options for Senior Citizens in India

How to Calculate Your Retirement Corpus?

7 Best Guaranteed Income Plans 2023 in India Their Eligibility, Features & Benefits

Importance of financial Planning for Retirement

4 Tips to Avoid Running Out of Money in Retirement

Importance of Retirement Planning

Top Investment Options for Retirement Planning

Why is it Good to Have a Retirement Plan Before Your Marriage?

Which are the Best Investment Plans for Indian Senior Citizens in 2022?

Retirement and Pension Plans in India- What are Your Options?

7 Secrets that can Make Your Post-Retirement Phase Prosperous

What Are Retirement Pension Plans?

What Are Superannuation Benefits?

What is the Minimum Lock-in Period for ULIP?

Retirement Planning for Millennials

Here's Benefits of Post Retirement Investment Options

Know the Pros and Cons of Retirement Annuities

Meaning of Sum Assured in a ULIP

Different Types of Retirement Schemes

How to Protect Your Retirement Account from Hackers

Why Should Retirement Planning Be on Top of Your Priority List?

Retirement Planning: Use our Retirement Calculator to Plan Ahead

Types of Retirement Plans

How To Choose The Right Pension Plan?

What is a Retirement Plan - What are its Features?

How Do Annuity Options Work In NPS

Retirement planning with a systematic life insurance plan

What are the Differences Between ELSS ULIP and Mutual Funds?

How to Win at Retirement Savings?

The Rise of ESG Investing in Retirement Planning

Understanding Annuity Plans

What are the Charges Levied on ULIP?

Getting Close to Retirement? Six Key Retirement Planning Tips That Can Help You Retire

Plan Your Retirement in India - Retirement Calculator

Changing Jobs? Reinvest Your Retirement Funds

Is ULIP Better Than FD?

How Does NPS Work?

Retirement: A New Start to Life!

NPS for Housewife

Which Is Better: ULIP or SIP?

6 Signs That You Are Not Financially Ready For An Early Retirement

How to Save for Retirement With Retirement Investment Plans?

Managing Your Money After You Retire

Benefits of Annuity Plan Investment

Types of Pension Plans and Their Tax Benefits

Is an Annuity a Good Investment Option?

6 investment options for the retired

Gift Your Parents a Sound Retirement Plan

How Much Corpus Does One Need for Retirement?

Terminologies You Should Understand About Retirement Plans

Is it possible to live a financially independent life, even after you retire?

How To Check EPF Claim Status- The Complete Process

Demystifying Retirement Financial Planning

Here's Retirement Planning Guide for Working Men & Women

What are the Instruments Available for Building a Retirement Corpus?

Here's are Advantages of Pension Schemes and Retirement Plans

Do Pension Plans Allow Any Death Benefits?

Ten Signs That You're Ready to Retire

Mistakes You Must Avoid While Planning Retirement

3 Ways to Save Early to Keep Living Out Your Dreams Post Retirement

How should one decide on fund allocation within NPS?

Turbocharge Your Retirement Savings with Annuities: Unlock Greater Returns

How Does ULIP Work in India?

Right Age for Retirement Planning and How to Go About It

What is the Difference Between EPF, VPF, and PPF? What are Their Tax Benefits?

Which Pension Plan Suits You best?

Annuity Plan | How to Choose the Right Annuity Plan | Kotak Life

What are the 4 Financial Phases of Retirement? How to Budget For Each One?

Retirement Planning Guide: These 5 Steps Will Help You Towards a Safe, Secure and Fun Retirement

Tips to invest your voluntary retirement scheme money

Retiring soon? Here’s why buying annuity plans may make sense

Steps to Figure Out How Much Money You Will Need After You Retire

How To Calculate The Present Value And Future Value Of Annuities?

Types of Annuity Plan | Annuity Definition - Meaning & Key Benefits

What tax benefits are there on saving for retirement?

ULIPs or Pension Plans – Which is a Better Retirement Plan?

What Retirement Would Look Like 30 Years From Now

10 Steps to Figure Out How Much Money You Will Need For Your Post Retirement Plans

The Significance of Number 8,000 in Retirement Planning

Early Retirement Planning Tips

What Is A 401(k) Retirement Plan?: A Beginner's Guide

Guide to Long Term Investment

Embracing the FIRE Movement: Financial Independence and Early Retirement

ELSS vs ULIP: Which is a Better Investment?

14 Tips to Ensure Successful Retirement Planning

Turbocharge Your Retirement Savings with Annuities: Unlock Greater Returns

Retirement Planning at 50? You Are Still Good to Go

How to Maximize Your Retirement Savings with a Pension Scheme in India

15 Passive Income Ideas for Seniors to Boost Retirement Income

Benefits of Early Retirement Planning

A Quick Guide to Retirement Plans

Types of Pension Plans for Your Retirement

Reasons you should Buy a Retirement & Pension Plan

What are the Benefits of ULIP - Explained

What is a Defined Benefit Plan and How it Works?

How Can NPS Help You Save Tax?

Important Questions To Ask Yourself Before Choosing A Good Retirement Plan

Inflation: A Key Factor to Consider into Retirement Planning

What Are Mortality Charges In ULIP?

Mastering the 30:30:30:10 Rule: A Guide to Effective Retirement Planning

How Has NPS Performed in Comparison with Other Instruments?

Benefits of Early Retirement Planning in India

Long-Term Investing: Boost Retirement Income with an Income Booster

What are the Rules for Exit From NPS?

What is an Annuity Plan, and How Does an Annuity Plan Work?

Top 3 Reasons Why You Should Start Retirement Planning Early