Features & Benefits of Pension Plans in India

7 min read • Published 30 October 2022
Written by Krishna Deshmukh
Features & Benefits of Pension Plans in India

Considering the rise in inflation and limited social security initiatives for senior citizens, it is important to start planning your retirement early. Pension plans can be a good way to start your retirement planning. The benefits of a pension plan will help secure your future financial needs.

What Are Pension Plans?

A pension plan is a financial tool that can offer you dual benefits of insurance cover and investment. A specific amount of money from your income needs to be invested regularly to build a considerable corpus for your post-retirement stage. Your investment can be redeemed as pay-outs at the time of the retirement. You can also invest in an immediate annuity where the person doesn’t have to build the corpus over time, only a lump sum payment needs to be made.

Pension plans generally have two stages – the accumulation phase and the vesting phase.

Accumulation phase: This is when you invest money into your choice of a pension fund plan. This stage continues till you retire. 

Vesting Phase: Once you retire, you start receiving a steady flow of income from your pension plan. This is known as the vesting stage. You will get back the money invested along with the returns either in the form of an annuity.

These plans are also known as benefit plans as they provide a stable source of income for retirees and financial security. 

These plans can also help senior citizens overcome any other uncertainties that might evolve in the future. Hence, investing in a correct pension plan has become important due to the increased cost of living and rising inflation. 

What Are the Features of Pension Plans?

These are some of the features of pension or retirement plans that you must know: 

  • Guaranteed and regular income 

Most pension plans in India offer fixed income after retirement. However, plans such as immediate annuity, permit you to start receiving annual or monthly income as soon as you invest. This pension is paid either for a specific period of time or until death. The income basically depends on the type of pension plan you choose. The annuity payment frequency can be monthly, half-yearly, quarterly, or annually as per the choice of the annuitant.

  • Liquidity

Although these plans have low liquidity, some allow withdrawal during the accumulation period in case of any financial emergencies. Hence, you can avail financial help during times of need in exchange for a withdrawal fee or penalty. 

  • Accumulation duration

You can either choose to pay the premiums in periodic intervals or at once in the form of a lump sum. The insurance company will re-invest your funds into various market securities to generate returns on your investment. Hence, staying invested for a long time or having a long accumulation duration will allow you to enjoy the power of compounding. 

  • Vesting stage

It is the stage or age after which you start receiving regular payouts from your retirement plan. Most pension plans keep the minimum vesting age at 45 to 50 years. At the same time, the maximum vesting age can be between 70-75 years. You can choose the age from when you wish to start receiving your pension. 

  • Tax benefits

Another important feature of a pension plan is its tax-saving attribute. A total contribution to pension plans of up to ₹1.5 lakh can be claimed under Section 80CCC . This includes spending on renewing existing insurance or buying a new pension plan. Tax exemptions depend on the type of plan that you choose. You might want to start investing in pension plans to reap maximum tax benefits.

  • Payment period

This is the time period for which you receive your pension after retirement. For instance, if someone gets a pension from the age of 60 to 80, the payment period will be 20 years. Most pension plans keep it separate from the accumulation period, while some permit full/partial withdrawal during the accumulation phase. 

  • Surrender value

 If you need to surrender a plan due to unforeseen circumstances, you will still receive the surrender value provided that the plan has passed the minimum duration. However, this applies to pension plans that include life insurance plan benefits.

Also Read: List of Top Pension Plans You Can Invest in India

What Are the Benefits of Investing in Pension Plans?

There are multiple advantages of pension plans are discussed below: 

  • Long-term savings

Since these schemes are long-term, you will be able to reap the benefits of compounding against your investments. Moreover, these plans ensure that a good corpus gets accumulated by the time you retire, so you get a steady cash flow after retirement.

  • Multiple options to invest

There’s flexibility in terms of both how to make the payment as well as how to get the pay-out from pension plans. You can choose to invest a lump sum amount and get monthly annuity payments, or you can invest in a deferred annuity plan that will keep accumulating interest before the pay-out begins. Investors have the freedom to choose according to their requirements.

  • Protects against inflation

Investing in a pension plan helps in protecting your assets against inflation. It disburses one-third of the accumulated corpus after retirement and provides the remaining two-thirds as a monthly annuity to the investor.

  • Secures future

Investing in retirement funds means you do not have to rely on liquidating your assets to bear your post-retirement expenses. Instead, pension plans will provide sufficient money to bear those expenses. Therefore, planning your finances beforehand will safeguard your future. 

  • Benefit of compounding 

Many people think that saving a portion of our salary will help construct a sufficient retirement fund. However, they do not consider the rise in inflation or any financial emergencies that they might face. The power of compounding of the retirement funds, on the other hand, helps in building a large retirement corpus.

  • Offers insurance

Most pension plans work as a life insurance cover. They also protect from any financial losses in case of the demise of the investor before retirement. Moreover, in case of any medical emergency, a lump sum amount can be withdrawn for treatment. This is one of the biggest advantages of pension plans.

  • Opportunity to diversify assets

Almost all pension funds let you choose the asset class you wish to invest in the most. You get an option to select from pure equity, pure debt or a mix of both. 

  • Wide variety of plans to choose from

You can choose from a wide range of plans according to your requirements. Each plan is different and serves different goals and purposes. 

Also Read: Types of Pension Plans You Can Choose for Retirement Planning

Final Words

Pension plans offer a regular source of income to people for their post retirement expenses. There are multiple benefits of investing in pension plans such as long term savings, tax deductions, providing insurance, flexibility to choose from a wide variety of plans as per your needs, etc. 

Frequently Asked Questions

What are the factors to consider before choosing the best retirement plan?

The first factor that must be considered is to see whether the inflation rate is lower than the return on investment of the plan. Secondly, choose the plan that provides an adequate pension that serves your expenses. Also, consider the vesting period before investing in that plan and whether it offers the annuity alternative that is appropriate for you.

How does a pension plan work in India?

An investor invests in the fund of their choice for a fixed period of time. After the plan reaches maturity, the investor starts enjoying pension benefits. You can either go on getting the pension benefits on a monthly basis or withdraw a lump sum amount and convert the rest into an annuity plan.

What are some Central government-backed pension plans in India?

Some of the pension schemes offered by the Government of India are the National Pension Scheme (NPS), Pradhan Mantri Vaya Vandana Yojana (PMVVY), Employee Pension Scheme (EPS), Varishtha Pension Bima Yojana (VPBY), Atal Pension Yojana (APY), Indira Gandhi National Old Age Pension Scheme (IGNOAPS), etc.

Was this helpful?

Krishna Deshmukh

Investment Principal
Krishna is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.E. (Hons) in Computer Science Engineering from BITS Pilani and MBA (Finance) from JBIMS, Mumbai. He is currently working as Investments Principal at Wint Wealth. Previously he worked at Kotak Mahindra Bank at their DCM desk and Northern Arc Capital at their Structured Finance desk. learn more

Popular Articles

Sovereign Gold Bond 2023-24 (Series 2): Price, Benefits, Issue Dates
Sovereign Gold Bond 2023-24 (Series 2): Price, Benefits, Issue Dates
  • 11 min read
  • 15 June 2023
Banking Ombudsman Scheme: Here is how to file your complaint against your Bank
Banking Ombudsman Scheme: Here is how to file your complaint against your Bank
  • 7 min read
  • 28 February 2023
How to Check Mutual Fund Status with Folio Number
How to Check Mutual Fund Status with Folio Number?
  • 5 min read
  • 6 December 2022
All about Form 60 and Form 61 under IT Act
All about Form 60 and Form 61 under IT Act
  • 10 min read
  • 6 April 2023
how to deposit money in sukanya samriddhi account online
How to Deposit Money in Sukanya Samriddhi Account Online?
  • 5 min read
  • 30 October 2022

Recent Articles

Muthoot Finance NCD Public Issue Tranche II September 2023 Review
Muthoot Finance NCD Public Issue Tranche II September 2023 Review
  • 5 min read
  • 18 September 2023
NPCI Launches 4 New UPI features
NPCI Launches 4 New UPI features
  • 4 min read
  • 14 September 2023
Kosamattam Finance September 2023 NCD Public Issue Review
Kosamattam Finance September 2023 NCD Public Issue Review
  • 6 min read
  • 7 September 2023
Indiabulls Housing Finance September 2023 Public NCD Review
Indiabulls Housing Finance September 2023 Public NCD Review
  • 5 min read
  • 6 September 2023
CreditAccess Grameen August 2023 NCD Public Issue Review
CreditAccess Grameen August 2023 NCD Public Issue Review
  • 5 min read
  • 22 August 2023