|Chennai||Rs. 24470.00 (1.37%)|
|Mumbai||Rs. 24900.00 (0.97%)|
|Delhi||Rs. 24200.00 (1.26%)|
|Kolkata||Rs. 24160.00 (0%)|
|Kerala||Rs. 24000.00 (0.63%)|
|Bangalore||Rs. 23800.00 (0%)|
|Hyderabad||Rs. 24140.00 (1.17%)|
Retirement planning is gradually gaining a prominent spot in the investment portfolio of every prudent investor. However, the benefit structure of a pension plan is hugely different from a conventional life insurance product. Let us take a look at the plan in general and understand how it works.
Simply put, pension plans build up a corpus to take care of your financial needs after retirement. On maturity, this corpus is used by the insurance company to generate a regular income stream which is called annuity or pension. Pension plans are of two types:
Under this type, the policyholder pays a single premium (a lump sum amount) upfront towards purchasing the plan and immediately afterwards the insurer starts paying the annuity. Currently no insurer in India offers this type of plan except LICI which has one policy offering immediate annuity.
Accumulation phase - in this phase, the policyholder pays the premium in installments for several years, say for 15 or 20 years. These premiums are collected and accumulated by the insurer to build up a corpus.
Withhdrawal phase - the policyholder chooses to receive annuities from a certain age called the vesting age which is after the accumulation phase. The insurer starts making payments from the vesting age which is called the withdrawal phase. The policyholder may choose the vesting age immediately after the accumulation phase or may wait for more years before receiving the pension. For example-a 40 year old man buys a pension plan where he pays premium for 20 years. Now he may choose to vest the policy at 60 years or may want to start receiving the annuities from 65 or 70 years.
There are other factors which come into play in a pension plan which is different and needs consideration.
Pension plans are now also being offered as ULIPs where the premiums paid are invested in the capital market which ensures a larger corpus accumulation. Lastly and most importantly, the tax benefit structure is different. Though premiums paid are exempted from tax u/s 80C (up to 100,000) like other plans, only the commuted amount (1/3rd of the corpus) is exempted from tax u/s 10(10A) and the annuities received are taxable in the hands of the policyholder. The working of the pension plan can be illustrated numerically:
Age (in years)
Premium paying term (years)
Premium amount (Rs)
Death benefit (Rs)
Corpus accumulated @6%
We take an example of a 30 year male who takes a policy where the accumulation phase is for 30 years. The SA is guaranteed at Rs.200,000 in event of death. Now let us see how the annuity amount varies if he chooses different vesting age.
Thus, we understand that the later the vesting age the larger is the annuity payout because the corpus grows with increasing time and also at higher ages the life expectancy falls. So now that you are familiar with the working of a pension plan, you should understand all the aspects of the plan you intend to buy. After all your retirement should be tension free, isn't it?
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
You may write to the author at Deepak@myinsuranceclub.com