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Guaranteed Pension Plan for your Retirement

With the golden years of life approaching (i.e., retirement), people's biggest concern is their financial stability in those years. An investment that promises a regular and steady flow of income during the retirement years provides much-needed peace of mind.

Let's read about the guaranteed pension plan, their working benefits, and the peace of mind they offer. Whether you are a seasoned investor or just planning for retirement, understanding the intricacies of a guaranteed pension plan is crucial for making a suitable investment.

What is a Guaranteed Pension Plan?

A guaranteed pension plan is an investment that ensures you have a steady income and corpus when you retire. The income you enjoy during your retirement years is directly related to the investment planning you do during your earning years.

With a guaranteed pension plan, you get assured returns on the investment corpus and a death benefit to your nominee, in case of your unfortunate demise during the policy term. The most crucial factor here is the stability in your income, unaffected by the market.

Some plans also provide guaranteed additions, thus enhancing your vesting benefits.

Features and Benefits of Guaranteed Pension Plan

1. Death Benefit

The guaranteed death benefit is paid to the nominee in case of the policyholder's unfortunate demise during the policy tenure. This death benefit is the corpus built from the paid premiums with its interest.

2. Guaranteed Additions

Some insurers provide assured regular additions at a certain percentage of the sum assured. For example, an insurer might provide guaranteed additions at 3% of the sum assured on every completed policy year.

3. Vesting Addition

Vesting Addition, an additional enhancement to your corpus, is a percentage of the sum assured payable as a lump sum at the time of vesting.

4. Premium Payment Term and Policy Term

Most plans provide a choice of premium payment term of 5, 7 or 10 years and a policy term ranging from 10 to 20 years. You can choose these terms as per your requirements and investment objectives.

Having a clearly defined payment and policy term as per choice makes it easier for the policyholder to plan their financial commitments effectively.

5. Income Age

You can choose your vesting age as per your life goals and requirements. Accordingly, you can start receiving the income immediately or after a certain period.

6. Surrender Value

Though it's always advisable to continue your policy to reap the maximum benefits, you always have the option to surrender it once it has acquired a surrender value.

The regular pay policies attain a surrender value after two years of premiums have been paid, and the single premium policies acquire a surrender value immediately after the first premium payment.

Besides, the surrender benefit offers liquidity in times of need.

7. Tax Benefit

The premium paid towards the guaranteed pension plan is eligible for tax deduction under Section 80C and the returns received are tax-free under Section 10(10D). However, the tax benefits are as per the prevailing tax laws.  

8. Annuity

The guaranteed pension plans provide a steady income stream through annuity payments, providing a reliable source of funds during retirement.

The annuity can be a single life or a joint life. In a single-life annuity, the annuity is paid to the policyholder as long as the annuitant/policyholder is alive.

For a joint life annuity, the secondary annuitant receives the annuity benefit after the primary annuitant's death, and the annuity is paid till the death of the last annuitant.

9. Top Ups

At any point, if you feel to increase your retirement corpus, most plans offer a top-up option wherein you can increase your premium amount and thus the retirement income accordingly.

10. Lapsation

In case of non-payment of the premium due within the grace period, the policy lapses if it has not acquired a surrender value and no benefits are paid.

11. Grace Period

If you miss paying your premium on time, you are provided a certain time extension during which the policy stays in force with risk cover. This extended period is known as the grace period.

It is 30 days in case of yearly, half-yearly and quarterly premium frequencies and 15 days for monthly premium frequency for guaranteed pension plans.

12. Paid Up Value

If, due to any reason, you stop paying your premium after the policy has acquired a surrender value, the policy is made paid-up at the end of the grace period. The benefits on a paid-up policy are reduced as per the premiums paid.

How Guaranteed Pension Plans Work?

Here is how guaranteed pension plans work:

Step 1: Choose your Vesting or Retirement age.
Step 2: Choose your premium amount and frequency as per your requirement.
Step 3: On retirement, the vesting benefit is paid. This vesting benefit includes sum assured, accrued guaranteed additions and vesting addition. This benefit can be paid lump sum or in the form of regular income annuity, as per the plan.
Step 4: In case of death of the policyholder during the policy term, the nominee receives death benefit which is the sum of all premiums paid plus compound interest at a certain interest rate.

Factors to Consider Before Choosing the Right Pension Plan

Here are some important factors to consider while choosing a pension plan:

1. Returns vs Inflation

Ensure that the returns guaranteed by your pension plan are sufficient to beat inflation. This would preserve the purchasing power of your pension over long term.

2. Adequate Returns

While buying an investment, we have certain financial goals in mind. Check if the returns from your pension plan are sufficient to meet your financial goals.

3. Vesting Age

Evaluate your financial requirements and accordingly decide the vesting age, i.e., the age at which you need to start receiving your income from the investment.

4. Annuity Option

There are various annuity options like single life, joint life, immediate annuity, etc. They offer different payout structures and survivor benefits. Choose the one that best suits your personal circumstances and financial requirements.

5. Your Age

One of the most important factors to consider is your age of investment. Power of compounding works best on an extended period. Hence, starting early is the key to generating a larger pension fund.

6. Sum Assured

Choose an optimum sum assured. A high sum assured ensures that your beneficiaries receive sufficient financial support in case of your demise.

Hence, it is crucial to choose a sum assured that is high, and at the same time, within your premium budget.

7. Flexibility

Check if the pension plan allows you flexibility in terms of contributions, withdrawal options, annuity options and changing the specifications during the policy term.

FAQs About Guaranteed Pension Plan

Is the Income from Guaranteed Pension Plan Taxable?

The income that comes in the form of annuity is taxable in pension plans.

Can I Withdraw my Money Before Retirement from a Pension Plan?

Since pension plans are designed to build a retirement corpus, it is never recommended to prematurely withdraw money from a pension plan.

However, most guaranteed pension plans provide an option of partial surrender or complete surrender, but in such a case, your returns are affected.

Can I Use a Guaranteed Pension Plan as Collateral for Loan?

Yes, a guaranteed pension plan can be used as collateral for a loan once it has acquired a surrender value.

Other Important Articles Related to Retirement & Pension Plans

Single Premium Pension Plan

Unit Linked Pension Plans

Defined Benefit Pension Plan

Planning

Age

Early Retirement

Retirement Investment Plans in India

Guides

Guaranteed Pension Plan

Disclaimer

This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.