Pension Plans

Q- What is a pension plan?

Ans- Pension plans also called retirement plans are designed to generate regular income for individuals after retirement. They are taken to compensate for the income in the retirement years. It consists of two stages namely accumulation phase  and income phase .

Q- How does a pension plan work?

Ans- You invest in a pension plan over the time to build a corpus just like in an investment linked life insurance. At the decided vesting date , or the retirement date, you buy annuity or pension with the corpus built through your investments. You can use the entire amount for purchasing annuity or withdraw up to 1/3rd of the amount and use the remaining 2/3rd for pension. Insurance companies offer various annuity options to suit your requirement of receiving pension.

Q- What is vesting date?

Ans- Vesting date is the time when you decide to end the accumulation phase and begin the income phase. It is largely based on your age and chosen date of retirement. It may be called retirement date and marks the end of accumulation phase and beginning of annuitization or the income phase.

Q- What is traditional pension plan?

Ans- A traditional pension plan is one where the returns are fixed and guaranteed. You pay a fixed premium for a definite number of years till you reach the vesting date to get fixed maturity amount. This maturity amount, whole or at least up to 2/3rd is then used to buy annuity. Insurance companies also give out guaranteed additions and announce bonus from time to time. This amount is also added to the maturity amount at the maturity date.

Q- How is pension plan different from other life insurance plans?

Ans- The basic difference lies in the purpose. Life insurance plans cover the risk in case of an unfortunate event while a pension plan is taken to guarantee regular income, in case of survival, after retirement and remains financially independent. The insured receives full maturity amount at the end of the policy but in pension plans one can only withdraw only up to 1/3rd of the corpus. Here the maturity amount, whole or at least 2/3rd of it is used to buy annuity or pension.