Pension Insurance Policies

12th July 2021 0 By indiafreenotes

Planning for retirement is a crucial aspect of everybody’s lives. Considering the rising inflation level and limited social security initiatives for senior citizens, it is vital that you start planning your retirement early.

A pension plan is a retirement plan that requires an employer to make contributions to a pool of funds set aside for a worker’s future benefit. The pool of funds is invested on the employee’s behalf, and the earnings on the investments generate income to the worker upon retirement.

An employer’s required contributions, some pension plans have a voluntary investment component. A pension plan may allow a worker to contribute part of their current income from wages into an investment plan to help fund retirement. The employer may also match a portion of the worker’s annual contributions, up to a specific percentage or dollar amount.

Public Provident Fund is one of the most popular retirement planning schemes in India. When you start contributing to your retirement early, the funds build a secure golden year money-wise over the years. A well-chosen retirement plan can help you rise above inflation, thanks to the power of compounding.

Several Key Terms to Consider:

Premium: The amount you invest in a policy

In pension plans, as with all insurance policies, the premium is the amount invested towards a policy purchased from an insurance company. The premium is income for the insurance company, but it also represents a liability, in that the insurer must provide coverage for claims being made against the policy.

Pension Plan: An investment option for an income after retirement

A pension plan is any investment planning scheme that provides you with an income after retirement. At its most basic level, a pension is a tax-efficient savings plan that you cannot receive any benefits from until a minimum age of 50. Depending upon the type of policy you have, you could receive pension payments for a defined period of time, or for the length of your natural life.

Beneficiary (or Nominee): The person/persons who benefit from the policy you take

This refers to the person or persons who receive the Death Benefit in case of the demise of the policyholder. If the nominee is a minor at the time when the policy began, a guardian can be appointed until such time the nominee reaches maturity. You can also have multiple nominees and specify the share (%) each one of the nominees receives.

Vesting Age: The age at which you start receiving a pension

The age at which you start receiving a pension in an insurance-cum-pension plan is known as the ‘Vesting Age’. For most pension plans, the vesting age does not come into force until the annuitant is 55 years of age.

Accumulation Period: The time period of your pension plan

This is the length of time for which one invests in a pension plan of their choice. For example, if you purchase a plan that requires a monthly investment of Rs.10,000 over 30 years, the ‘term’ of 30 years is known as the ‘Investing Period’.

Maturity Benefit: The amount you receive at the end of your investing period

The total amount you are eligible to receive following the end of the investing period is referred to as the ‘Maturity Benefit’. An alternative term for this is ‘Annuity Benefit’. In equity-linked pension plans, the higher value between the Fund Value and Guaranteed Maturity Benefit at the end of the investing period is the Maturity Benefit.

Features & Benefits of Pension Plans

Surrender Value

Surrendering one’s pension plan before maturity is not a smart move even after paying the required minimum premium. This results in the investor losing every benefit of the plan, including the assured sum and life insurance cover.

Accumulation Duration

An investor can either choose to pay the premium in periodic intervals or at once as a lump sum investment. The wealth will simultaneously accumulate over time to build up a sizable corpus (investment+gains). For instance, if you start investing at the age of 30 and continues investing until you turn 60, the accumulation period will be 30 years. Your pension for the chosen period primarily comes from this corpus.


Retirement plans are essentially a product of low liquidity. However, some plans allow withdrawal even during the accumulation stage. This will ensure funds to fall back on during emergencies without having to rely on bank loans or others for financial requirements.

Guaranteed Pension/Income

You can get a fixed and steady income after retiring (deferred plan) or immediately after investing (immediate plan), based on how you invest. This ensures a financially independent life after retiring. You can use a retirement calculator to have a rough estimate of how much you might require after retiring.

Payment Period

Investors often confuse this with the accumulation period. This is the period in which you receive the pension post-retirement. For example, if one receives a pension from the age of 60 years to 75 years, then the payment period will be 15 years. Most plans keep this separate from accumulation period, though some plans allow partial/full withdrawals during accumulation periods too.

Vesting Age

This is the age when you begin to receive the monthly pension. For instance, most pension plans keep their minimum vesting age at 45 years or 50 years. It is flexible up to the age of 70 years, though some companies allow the vesting age to be up to 90 years.


Some pension plans provide tax exemption specified under Section 80C. If you wish to invest in a pension plan, then the Income Tax Act, 1961, offers significant tax respite under Chapter VI-A. Section 80C, 80CCC and 80CCD specify them in detail. For instance, Atal Pension Yojana (APY) and National Pension Scheme (NPS) are subject to tax deductions under Section 80CCD.