Pension Plans

Retirement planning is an important aspect of planning your savings. A good retirement plan can help you live an independent life even when you retire. One option you could evaluate is the pension plans offered by insurance companies.

What are pension plans?

A pension plan is designed to generate regular income for individuals once they retire. Insurance companies offer various pension plans (also called as retirement plans or annuity plans) where a person has to initially invest either a lump sum amount or regular annual installments/ premiums over a period of time in return for regular income either for life or for fixed number of years depending, upon the plan. For example, Rita received Rs. 10L superannuation benefit upon retirement. She was interested in getting regular income out of this fund in order to meet her routine daily expenses. So Rita started exploring her options and stumbled upon the idea of investing her money in a pension plan. Rita researched the different types of pension plans offered by insurance companies and here is what she found:

Deferred Annuity Plan:

Under this type of plan, the pension is not paid immediately but deferred for a time period as required by policyholder. If the policyholder survives the term of the policy, then the accumulated amount (consisting of sum assured, guaranteed additions and bonuses) is invested to generate regular income. For example, LIC has Jeevan Nidhi plan which is a deferred annuity plan. Rita concluded that this option is suitable for an individual who is still working and has many more years before he/she retires.

Immediate Annuity Plan:

Rita found this plan interesting. This is because this plan can be purchased for a lump sum in return for fixed payments throughout her life. Insurance companies offer various options under annuity plans. There are different categories of Immediate Annuity plans:

Annuity Certain:

Here the insurance company pays a fixed sum of money for a certain number of years.

Guaranteed Period Annuity:

Under this plan, Rita will be paid pension for a certain number of years as stated in her plan (say 10 years) even if she does not survive this period. So, if Rita dies after 4 years of purchasing the policy, her nominee will receive the pension amount for the remaining 6 years. If she survives through the 10 years then she will receive the pension amount throughout her life.

Life Annuity:

Rita will be paid a specified amount regularly through her life. This plan also comes with the option of 'return of purchase price' to the beneficiary upon the policyholder's death. In case Rita opts for this plan, her nominee will get the maturity amount plus any bonus upon her death.

For example, LIC has Jeevan Akshay annuity plan for annuity payable for 5, 10, 15 or 20 years or for the lifetime of policyholder. There is also a life annuity plan where 50 percent of the annuity is payable to the spouse in case of death of policyholder.