In India, there are various types of pension plans on offer and these can vary based on the type of investment, style of investment as well as the authority that manages the plan. The following are some key types of pension plans in India that are available through different avenues:
Pension Funds: These are usually debt oriented hybrid mutual funds capable of providing 80C tax benefits that are managed by fund houses i.e. asset management companies. These mutual funds invest a large portion of their capital in relatively low risk bonds, government securities and various money market instruments. The remaining minority portion of the fund is invested in equities and equity derivatives. Being a hybrid fund, pension funds combine the best features of equity and debt investments. Equity investments of the scheme help the pension fund grow when capital markets are witnessing a boom, while the debt/money market investments help the fund contain losses during capital market busts. Being majorly invested in debt and money market instruments, pension funds are taxed according to short term and long term capital gains rules applicable to non-equity investments.
Immediate Annuity Plans: These plans are typically provided by life insurance companies and the pension pay outs and these plans starts immediately after the lump sum premium payment is made. In this case, the applicant has to make a lump sum premium payment when signing up for the immediate annuity pension plan of their choice. These annuity payouts are available as weekly, monthly, quarterly, bi-annual and annual payouts depending upon the policyholder’s requirement or choice.
Deferred Annuity Plans: Deferred annuity pension plans work in a manner similar to life insurance as it requires the policyholder to make regular (monthly, quarterly or annual) premium payments into the scheme for a fixed number of years. The period during which the plan holder makes such payments is termed as the accumulation phase. This money paid into the scheme by the policy holder during the accumulation phase is utilized to purchase immediate annuities which generate payouts once the accumulation phase comes to an end.
Pension Plans with Life Insurance Cover: This type of pension plan offered by life insurance companies features a combination of life insurance cover along with the pension plan annuity payout benefits. As a result, it is best described as a ULIP or unit linked insurance plan. Due to the presence of the life coverage component, these schemes are eligible for tax exemption benefits under Section 80C of the Income Tax Act, 1961. This type of pension plan provides some degree of financial security to the policyholder’s next of kin in case of the unexpected demise of the policyholder. On the other hand, if the policyholder survives the accumulation phase of the plan, he/she would be eligible for annuity payouts as per the policy’s pension norms.
Guaranteed Period Annuity: In case of the pension plans mentioned in the prior sections, the annuity pay outs would occur at specific periods of weekly, monthly, quarterly, annual etc. But these payouts occur only after completion of the accrual phase. In case of guaranteed period annuity, the insurance company would issue payouts after specific intervals irrespective of whether the accumulation phase of the pension plan is ongoing or completed. Such pension plans can issue lump sum pay outs in the 5th year, 10th year, 15th year and so on.
National Pension Scheme: The National Pension Scheme (NPS) was initially introduced as the New Pension Scheme in order to phase out the state and central government pensions offered to government employees. Since its introduction, the NPS has undergone a multitude of changes and currently this scheme is available to non-government employees too. NPS invests in various capital market instruments such as equities, debt and government securities with pre-determined maximum and minimum allocation in each category. Because the scheme exclusively invests in market linked instruments, it does not offer guaranteed returns and the subscriber also has the option of discontinuing his/her NPS subscription as per applicable rules. If the NPS account of an individual is held till maturity, then a lump sum withdrawal may be made at the time of retirement. However, at least 40% of the NPS corpus must mandatorily be utilised to purchase annuities, while the remaining 60% is available for withdrawal. NPS investments also provide subscribers with tax benefits under Section 80C subject to various applicable terms and conditions.