What is a pension plan?

Pension plans or retirement plans are offered by Life Insurance Companies to help individuals build a retirement corpus. On maturity this corpus is invested in an Immediate Annuity Plan for generating a regular income stream, which is referred to as annuity payout

Typically, pension plans have two phases:

  • Accumulation phase: The premiums paid by the policyholder accumulate through the tenure of the plan. The policyholder has the option to choose Traditional or Unit Linked Pension Plan based on their risk taking capacity. On vesting, the policyholder has the option to invest the entire proceedings in Immediate Annuity Plan from the same Life Insurer or commute 1/3rd of the accumulated corpus as a lump sum amount and invest the remaining in Immediate Annuity.

  • Annuity phase: This follows the accumulation stage, wherein the policyholder starts getting payouts from the accumulated corpus. The age for the start of the payouts is decided by the policyholder and is called the vesting age. In most plans it is usually between 30to 70 years. In the immediate annuity option, a person can pay in lump-sum, instead of over the years, and start getting income immediately.

Payout frequency

The frequency of annuity payments to be received can be monthly, quarterly, half-yearly or annually.

Tax Definitions:

 

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