Annuity / Pension Plans in India – Detailed Overview

Retirement is an inevitable stage that comes in every working individual’s life. It is a stage in life which is likely to bring feelings of apprehension, especially in terms of finances. Now that regular paychecks will no longer be there, maintaining one’s lifestyle and meeting expenses is a valid worry which will every retired individual’s mind. However, insurance brings a special product designed specially to provide a regular income after you’ve retired, and in some cases, also provide insurance cover. Here are some important things which can help you decide on which pension plans is best suited for you.

What is an Annuity/Pension Plan?

Annuity is an insurance product that pays income and can be used as a part of retirement planning. You need to make an investment in the annuity and it makes payments to you on a future date. The payments are determined on length of your payment period.

Why Do I Need A Pension Plan ?

Retirement is a stage which comes in every working individual’s life, which can give rise to apprehensions in terms of income and maintaining one’s lifestyle. Post retirement, an individual’s source of income may no longer be there, forcing them to change their lifestyle. At such a time, a Pension Plan ensures that you continue receiving regular income after your retirement, once the regular work paychecks cease. After working for a major part of your life, a retirement is a well-deserved time, during which you should enjoy life. A pension plan will help fund the activities remaining on your bucket list, while also allowing you to be financially independent.

Benefits of Pension/Annuity Plans :

There’s a large part of our population which is fast approaching retirement, making them ideal candidates for pension plans. There is no shortage of insurers offering pension/annuity plans in India, making it easy for one to choose from a bevy of options. However, before you choose a certain plan, it is important that you understand exactly what that plan has to offer, its advantages, disadvantages and all related details. There are plenty of available in the market, each with its own set of benefits and advantages. Some of the benefits common to all pension plans are listed below.

Provision of Regular Income Post Retirement – One of the biggest benefits of an pension plan is that it provides incomes after retirement. Pension schemes available in India help you cover your living expenses post retirement by providing a guaranteed income. With the variety of pension plans available out there, you can choose from one which suits your needs best. While some plans provide you with lifelong income, there are others which offer better returns.

Funds at Times of Need – Some pension plans provide lump sum payments which can help you meet major expenses through life. Before your retirement, you may have several major expenses to take care of life purchasing a house, financing your child’s education, etc. Before you choose a policy, make sure you go over the details of the policy so you know exactly what you will be getting from it.

Tax Benefits – Investing in an insurance policy comes with a set of tax benefits which you can avail. The same applies to retirement insurance plans. Check all the policies which you may have short-listed for the tax benefits they offer. Investing in a pension plan from an early age can help you save considerably on tax payments. Check your policy details to find out and understand the ways in which you may benefit from the available provisions of tax exemption under Section 80C of the Income Tax Act.

Insurance Protection – In addition to providing income post retirement, pension plans also provide insurance cover. This is especially useful to provide protection in the unfortunate event of a death following which the family’s income will be protected. Insurance cover forms a part of most retirement plans which are offered by . this is helpful so that the surviving spouse does not have to undergo the financial burden following an unfortunate event.

Annuity/Pension Plan Options :

There are 5 segments but the range of options varies from person to person. The 5 segments are as follows:

  • Annuity Payable For Life

    Fixed annuity is paid at regular intervals throughout the insured’s life. The pension is stopped on the annuitant’s death. If you don’t have any obligations post your death, then opt for this option. Highest amount of pension is payable to an individual compared to the other options.

  • Annuity Payable For Life With A Guaranteed Period

    The annuity is paid for a certain period and thereafter till the annuitant is alive. If the guarantee period is shorter, you will get higher pension. The annuity stops on the death of the annuitant. If you have children who can take care of you after a few years, take this option for a shorter period.

  • Life Annuity With Purchase Price Return

    If you want to leave any amount for your dependents, then opt for this option. The annuitant will get pension till he dies, after his death, the purchase price will be given to the nominee.

  • Increasing Annuity at a fixed rate

    The annuity paid increases each year with this option.

  • Joint life and last survivor annuity

    Annuitant will receive pension till he dies, if his spouse survives then she is also entitled to the pension. The considerable amount of pension to be paid to the spouse can be selected.

Types of Annuity/Pension Plans :

The following are the types of Annuity/ Pension Plans: available.

  • Deferred Annuity

    Here the annuitant pays premiums till the policy term is over. After its term, the annuitant will start receiving the pension. No tax is levied on the amount the annuitant invests. You can make a one-time payment or make regular contributions towards the plan.

  • Immediate Annuity

    The annuitant has to deposit a large amount and the pension will begin immediately. The annuitant can avail tax benefits prevailing in India.

  • With & Without Cover Pension Plan

    ‘With cover’ will give you a life cover, a lump sum amount is paid to your family in the event of your death. ‘Without cover’ implies you do not get any life cover. The amount built till the date of your death is paid to your dependents. Deferred annuity is with cover and immediate annuity plans are without cover.

  • Annuity Certain

    Annuity is paid for a specific period. If he dies before that period, the beneficiary receives the amount.

  • Guaranteed Period Annuity

    Annuity is paid for certain periods regardless of the survival of the annuitant.

  • Life Annuity

    Pension is paid till the annuitant’s death. If with spouse options is chosen, then the pension will be paid to the spouse.

  • National Pension Scheme

    This is introduced by the government. You have the option of withdrawing 60% of the amount at retirement and the rest is used to purchase annuity. The maturity amount is not tax free though.

How to Choose The Right Pension Plan?

With the variety of pension plans available in the market, it could be a challenge to choose the one which suits your requirement best. However, before you invest in a pension plan, there are some basic parameters you must evaluate.

  • Returns – The most important part of any investment is the return it provides. Chose a pension only after you have a fair idea about the returns it would provide. Always keep in mind that if returns are guaranteed, the rate of returns will be low. Choose an option which provides high returns.
  • Liquidity – While most pension plans will have a lock-in period, during which you cannot withdraw the invested funds, there may be some plans available which offer a certain degree of flexibility in terms of withdrawal.
  • Tax Benefits – Insurance payments can help you save on tax payments to a certain extent. The same goes for pension plans. Before you invest in one, ensure that you find out the tax implication that the plan will come with.
  • Tax Exemption of Dividend / Interest – Another factor to consider when looking or pension plans is the tax exemption of the interest or dividend which you’re going to receive. Most pension mutual fund dividends are not exempt from tax.
  • Minimum & Maximum Investment Amount – Different pension plans carry different limits in terms of the minimum and maximum investment which can be made towards the plan. Check this before you invest so you can plan your budget accordingly.
  • Investment Mix – This factor comes into play only with regard to pension plans which are offered as part of a mutual fund. Find out the investment mix offered by the pension plan. While, usually the schemes are balanced, they may change over time.
  • Additional Benefits – Retirement plans offer are often accompanied by a string of additional benefits like life cover, tax advantage, etc. Find out the additional benefits which different plans offer, before you make your selection.

Eligibility Criteria for Pension Plans:

In order to be eligible for a pension plan, individuals must fall within a certain age group, usually between 35-75 years. This age bracket (min-max age) may differ with different insurance providers.

Pension Plan Riders:

Most pension plans come with add-on riders which can be taken to enhance the benefits provided by the plan. some of the commonly available riders include:

  • Accidental death and dismemberment rider
  • Term rider
  • Critical illness rider
  • Waiver of premium rider

Popular Pension Plans Available in India:

SBI Life – Annuity Plus

With this plan you can choose your annuity options. You can enjoy the following:

  • Regular income from the age of 40.
  • Lifetime annuity pay-out is paid for you and your family.
  • You can choose the frequency of the pay-outs.
  • You can add a rider, SBI Life- Accidental Death Benefit Rider.
  • You get the following options: Single Life annuity, Lifetime income with Balance Capital Refund, Lifetime income with Annual increase of 3-5%, lifetime income for 5, 10, 15 or 20 years, Two Lives’ Life Annuity.
  • You can avail tax benefits as per the tax laws prevailing in India.

HDFC Life New Immediate Annuity Plan

  • Get guaranteed income for as long and you and your spouse lives.
  • Choose from the wide variety of annuity options.
  • Choose the frequency of annuity.
  • Death benefit on certain annuity options are payable.
  • Tax benefits can be availed and they are subject to the tax laws in India.

ICICI Pru Immediate Annuity

You need to make a one-time payment or choose from the 5 pay-out option. You get 4 modes of pay-out i.e. monthly, quarterly, half-yearly or yearly. The pay-out options are as follows:

  • Annuity for life.
  • Annuity for life with return of purchase price.
  • Joint life, last survivor without purchase price return.
  • Joint life, last survivor with purchase price return.
  • Guaranteed annuity for 5, 10 or 15 years.

Reliance Immediate Annuity Plan

This is a single premium plan. You can avail the following benefits from this plan:

  • Earnings can be converted to regular income.
  • You can get regular income for your entire life.
  • You can leave some funds for your dependents.
  • Receive tax benefits as per tax laws prevailing in India.

BSLI Immediate Annuity Plan

You can avail the following benefits with this plan:

  • You can get regular income in your retirement.
  • You can choose the frequency of the pay-out.
  • You need not have to undergo a medical test to avail this policy.
  • You can enjoy tax benefits under Section 80CCC of the Income Tax Act, 1961.

Pension Plan FAQs

  1. Can I make an early withdrawal from my pension plan?

    A. Early withdrawal from retirement plans may be allowed. However, there are certain government regulations applicable on early withdrawal from retirement policies. Do check with your insurer regarding early withdrawals before you invest in a certain plan.

  2. What is Death Benefit under a Pension Plan?

    A. In a pension plan, Death benefit is defined as the amount which will be paid on the passing away of the insured to the beneficiary of the insured, named in the policy.

  3. Are there any tax benefits accompanying Pension Plans in India?

    A. Yes, Pension Plans do provide tax benefits to the policy holder. Under section 80CCC of the Income Tax Act, premiums which you pay towards your Pension Plan will be subject to deduction up to the maximum amount of Rs 10,000 on your taxable income.

  4. What is meant by Annuity in a Pension Plan?

    A. Annuity is the term used to define the systematic payouts which you receive from your pension plan after your retirement. Most pension plans will allow individuals to avail annuity payouts on a monthly, quarterly, half-yearly or yearly basis.

  5. Can I apply for a Pension Plan online?

    A. Yes, most insurance providers have comprehensive websites which not only allow for viewing of different pension plans but also allow them to apply for a plan of their choice online.

  6. Can I make the premium payment for my Pension Plans online?

    A. Yes, online payment of premium can be done very easily. Most insurers do have a secure payment system in place to enable policy holders to pay their premiums online in a timely manner, without having to visit the branch office.

  7. I want to change my premium payment frequency for my Pension Plan. Can it be done?

    A. If you wish to change your premium payment frequency, you are advised to contact your insurance provider for the same as the facility may or may not be allowed by different insurers.

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News About Annuity/Pension Plan

  • LIC releases new pension plan for senior citizens of Rs.10,000 per month

    Life Insurance Corporation of India (LIC) rolled out the Pradhan Mantri Vaya Vandana Yojana (PMVVY). The pension scheme is non-participating and non-linked subsidized by the center for all senior citizens (60 years of age and above). The new PMVYY scheme had been modified by the finance ministry very recently. This scheme had been extended till 31 March, 2023. Along with this had come an assured interest rate of around 7.40% per annum for the financial year, 2020-21. This pension scheme also guarantees a monthly income of up to Rs.10,000 for a period of 10 years. In the release, the company had said that for the policies which will be sold over the next 2 financial years, the assured rate of interest, will be reviewed and then a decision will be made at the start of every financial year.

    22 September 2020

  • Contributions made by the employer towards retirement funds capped

    As per the Budget 2020-2021 announced by the Finance Minister Nirmala Sitharaman, the upper limit for contributions made by tax-free employers towards the retirement funds has been capped.

    According to the budget, the contribution made towards the superannuation fund, recognised provident fund, and the National Pension System (NPS) has a limit of Rs.7.5 lakh. The new rules will be effective from 1 April 2021. According to the budget document, a proposal has been made so that the combined upper limit for the employer’s contribution towards superannuation fund, recognised provident fund, and NPS would be capped at Rs.7.5 lakh. Any excess contribution that has been made will be taxable. Earlier, the contribution of the employer towards NPS and the provident fund were tax-exempt. Employees could contribute 10% and 12% of their basic salary towards the funds. According to the co-partner of Sahade and Associates, Shubhada Sahade, the move will have an impact. The take-home salary of the individual will decrease since the taxable amount will be high. Shubhada Sahade further added that there could be a challenge for corporates since the calculation of interest has not yet been prescribed. Various other income tax slabs have also been introduced in the budget.

    13 February 2020

  • Cost-Effective Retirement Plans Yielding Rs.47 Lakh or More

    It is never too late to start planning for your life after retirement. Pension plans, also known as retirement plans are essentially plans that are designed specifically for the welfare and well-being of elderly people, after they have stopped receiving a steady flow of income.

    As you grow older, your cost of ensuring a good pension reduces for yourselves as the subsequent medical costs go up substantially. So why not start investing at a super early and young age when you know that you are free of diseases and will have to pay relatively lower premiums. A newborn child cannot possibly invest in a life insurance policy for himself, therefore his parents will have to do so. Make sure that you buy a comprehensive life cover for your kids for they will prove to be highly beneficial as your kids grow up.

    Why should parents have to take care of their child’s retirement life? They should be able to do so as they are growing up. However, with simple, cheap, and realistic life insurance policies, all it takes now is just Rs.10, thanks to the super popular scheme of the Indian Government, the Public Provident Fund or PPF. As you may already know, PPF accounts come with a lock-in period of 15 years. What this means is that the accumulated money will have to remain in the account along with full benefits for at least 15 years.

    5 December 2018

  • Atal Pension Scheme to get tax benefits on par with National Pension System

    The Income Tax Department recently announced that investments made towards the Atal Pension Yojana (APY) will enjoy the same tax benefits offered by the National Pension System. Estimates show that over 20 lakh members have joined the APY since its inception in June 2015. With the government contributing 50% to the investment made by a member under this scheme, it has garnered great attention. With a minimum term of 20 years, added income tax benefits are bound to bring new members under its fold.

    23 February 2016

  • FDI of Insurance Companies with pension plan under scrutiny

    Foreign Direct Investments of Insurance companies with pension ventures is under a lot of scrutiny owing to lack of clarity on how foreign limit investment limit in the pension sector should be calculated. The Foreign Investment Promotion board had recommended a foreign investment proposal worth Rs.1,705 crore for the consideration of cabinet committee on Economic affairs.

    25 January 2016

  • CPPIB invests a whooping Rs.1,000 crore in Larsen & Toubro

    Canada Pension Plan Investment Board invested a whooping Rs.1,000 crore in Larsen & Toubro’s infrastructure arm. This is the second tranche investment made by the company in the engineering major Larsen & Toubro. The first tranche of investment was in December 16, 2014 where the company invested Rs.1,000 crore.CPPIB's subsidiary has made the second tranche of investment today by subscribing to compulsorily convertible preference shares of L&T IDPL

    16 December 2015

  • Retirement planning is important for all

    With a proper asset allocation plan, one can secure one’s retirement. Talking about the importance of retirement planning, Nilesh Shah, the Managing Director of Kotak Mutual Funds says that that the pattern of living life has changed and it is important that your plan for your retirement rather than simply relying on your parents. Because, the option of relying on your children no longer seems to work. According to him, you can plan your retirement by allocating your assets into various investment tools such as equity, real estate, debt and commodities. It helps people maintain a good financial health and ensure a secured financial future.

    8 December 2015

GST of 18% is applicable on life insurance effective from the 1st of July, 2017

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