Different Types of Retirement Plans in India

9 min read • Published 17 October 2022
Written by Krishna Deshmukh
Know the 3 different types of retirement plans in India

Table of Contents

Retirement plans are beneficial investment schemes that financially secure a beneficiary’s life after retirement. Despite inflation, these plans can help the beneficiaries maintain their standard of living and grow financially in the long-term. 

There are different retirement plans available in India that are based on annuity, insurance, and government schemes. Hence, one can choose a retirement plan as per his/her preferences, which could greatly help during future emergencies. If one retirement plan doesn’t fulfil your monetary needs, you can consider other options to maximise financial security.

What Are Retirement Plans? 

A retirement or pension plan is an investment fund that allows you to accumulate wealth over the years and reap the benefits once you retire. These plans are most suited for individuals who wish to plan the finances of their retired life early in order to meet post-retirement needs such as medical and living expenses. 

There are different types of retirement plans that one can choose. The three main types of retirement plans that are prevalent in India have been discussed in the blog. 

 Different Types of Retirement Plans in India

Before getting a retirement policy, you should familiarise yourself with the three essential types of pension or retirement plans in India:

  1. Employment-Based Pension Plans

Under this plan, during your employment period, a part of your salary gets deducted and is deposited under the Employee Pension Scheme (EPS). You will get a monthly pension from your respected EPS account after retirement. These government schemes are also considered non-insurance pension plans as they cannot be availed from an insurance company. 

Over the years, the corpus gets accumulated as a considerable amount to provide you with future benefits. Furthermore, both the employer and employee contribute to an EPS per the rules laid out by the government. Thus, it becomes a part of the employee’s gross salary. 

The various types of retirement plans based on employment are:

  • Defined Benefit Plans

In a Defined Benefit Plan, the employer calculates the employee benefits using several factors, such as length of employment and salary history.

  • Defined Contribution Plans

In a Defined Contribution Plan, employees contribute a fixed amount of their income to an account that is intended to fund their retirement. In this case, the pension amount is based on your contribution and the investment returns. A defined benefit plan guarantees your pension regardless of the returns the pension fund generates.

  • Hybrid Plans

A Hybrid Plan is a type of pension plan combining features of defined benefit plans and defined contribution plans.

  1. Insurance-Based Pension Plans

Insurance-based Pension Plans can only be availed from an insurance company and not from any other source. They are a combination of both pension income and death benefits and, thus, are also referred to as Personal Pension Plans. 

Over the years, the individual accumulates a substantial amount, which the insurer later pays out as a monthly pension. Some of these policies include life insurance coverage and death compensation to the nominee.

The various types of pension plans based on insurance are:

  • Immediate Annuity Plans

Immediate Annuity Plans are pension plans having no waiting period for the annuity to start getting credit in the individual’s account after retirement. The frequency of annuity payment can be monthly, half-yearly, quarterly, or annually as per your individual choice.

  • Deferred Annuity Plans

Deferred Annuity Plans are retirement plans that provide a fixed amount of payment after a specific date. Furthermore, the insurance company invests these funds in low-risk debt instruments or capital markets securities like stocks and bonds to generate substantial returns. 

  • Pension Plans with Cover 

Pension Plans with cover are a convergence of life insurance plans and retirement benefit schemes and offer death compensation.

  • Pension Plans without Cover

Pension Plans without cover only offer annuity in the form of insurance after retirement; however, they do not provide death compensation to users.

  1. Government Retirement Plans

Government Retirement Plans are types of pension plans that the government launches to provide funds periodically after retirement. The primary motive is to provide social security to senior citizens through a pension. 

Some of these pension policies include both life insurance coverage with retirement benefits and death compensation. 

Some of the retirement schemes set up by the government are:

  • National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a country-wide pension scheme administered by a dedicated government body named Pension Fund Regulatory and Development Authority (PFRDA). This scheme has two tiers which are as follows:

Tier I: This is the standard account where you must deposit a minimum amount of Rs. 6000 per year. There are withdrawal restrictions in this account till the maturity of 10 years. After this, you can withdraw 25% of the total accumulated fund only for specific purposes. 

When you reach the age of 60 years, you can withdraw 60% of the corpus. Furthermore, you can shift to an annuity plan for the balance amount to get a regular pension income. However, a 100% lump sum withdrawal is permitted if the pension corpus is less than Rs. 2,00,000.

Tier II: This account acts opposite to the Tier I account by offering flexibility to individuals. Here, you can invest your surplus money freely and withdraw your funds whenever you need them. however you must have a Tier I account in order to open a Tier 2 account.

Furthermore, for both the tiers mentioned above, you can select the option of ‘Auto Choice’ or ‘Active Choice’. If you have chosen the option ‘Auto Choice’, the funds will automatically get invested into debt and equity securities based on your age. Whereas, if you select ‘Active Choice’, you will have the authority to choose your preferred portfolio. Here, you can get either 50-50 debt and equity or only debt or only equity-subjected portfolio. 

One stark difference between Tier I and Tier II accounts is that the latter will not get taxation benefits while Tier I schemes will.

  • Public Provident Fund (PPF)

Public Provident Fund (PPF) is not a declared pension plan, but it serves all the features of the same. It is a government scheme that provides a sovereign guarantee of your invested money.

Here, you can invest Rs. 1,50,000 yearly in your PPF account and get attractive interest rates for the same. Moreover, you can withdraw this accumulated fund after maturity of 15 years and then buy the annuity plan from a PFRDA recognised pension company. 

  • Senior Citizen Saving Scheme (SCSS)

In the Senior Citizen Saving Scheme (SCSS), any senior citizen above 60 years can benefit from this scheme by investing up to Rs. 15,00,000. It is a government-assisted policy providing a quarterly pension that gets directly credited to the bank account of the respective senior citizen. 

The current interest rate of SCSS is 7.4% p.a., and tenure is of 5 years which you can extend to three more years after maturity.

  • Pradhan Mantri Vay Vandna Yojna (PMVVY)

Pradhan Mantri Vay Vandna Yojna (PMVVY) is a retirement scheme similar to the SCSS. This scheme is suitable for senior citizens having lump sum funds after retirement. You can enter this scheme after the age of 60 years and invest up to Rs. 15,00,000. Additionally, This scheme is administered by LIC, backed by the Government of India and provides an interest rate of 7.4%. 

This scheme has a tenure of 10 years, however you can opt for premature withdrawal in certain exceptional circumstances like critical or terminal illness of self or spouse. Further, after 3 years of the policy, you can avail a loan against it. The maximum limit of the loan is up to 75% of the investment amount.

Final Word

It would help if you started thinking about retirement plans early in life to enjoy your retirement peacefully. They provide you with financial coverage after your retirement so that you can fund your basic needs easily. There are different types of retirement plans in the market that serve the same financial goal. It is ideal to select one that fits your needs.  

Frequently Asked Questions

Q1. When should I start planning for retirement in India?

Ans. Planning your retirement at the earliest is best, but it also depends on your life stage. For example, focus on collecting assets if you have just started working. On the other hand, if your retirement period is 10-15 years away, you should clearly focus on getting a pension policy.

Q2. What are the tax benefits on different types of retirement plans in India?

Ans. You can avail tax deductions of up to Rs. 1,50,000 under Section 80CCC of the Income Tax Act, 1961 for paying premiums for new or renewing existing policies. Additionally, investing in the National Pension Scheme (NPS) allows you to save an additional Rs. 50,000. 

The withdrawals, however, are not entirely tax-free. One-third of the corpus received by the retiree (soon after reaching the retirement age) is tax-free. The rest of the money is paid as an annuity and is subject to taxation, depending on the retiree’s income tax slab rate.

Q3. How much should I invest in a retirement plan?

Ans. A retirement plan’s investment depends on personal factors like standard of living, purchasing power, financial urgencies, etc. You can calculate the required amount based on these factors and invest accordingly.

Q4. What is an annuity in a retirement plan?

Ans. An annuity in a retirement plan is the regular redemption THAT you receive as a pension after retirement. There are various types of retirement plans that offer you annuity payments after the annuitised period of the plans begins. 

Q5. When should I buy a retirement plan in India?

Ans. With people seeking early retirement and an increase in life expectancy, retirement duration nowadays has increased to 30-35 years. However, this depends on several factors like inflation and changing lifestyles which make the early investment necessary. Hence, the right time to buy a retirement plan in India depends on your current financial ability and future goals. 

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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.

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