Ch. 2: Retirement Plans - Pension Accumulation Plans - Benefits

One of the most important financial decisions that you should make is saving for your retirement. Consistent savings, even if they are modest, will help you a lot down the road - when you have no income!

A good choice to consider is a Pension Accumulation Plan. It helps you build a substantial retirement fund, by investing your savings systematically. And, now that you know why you should invest in a Pension Accumulation Plan, let’s have a detailed look at the benefits it offers.

They are of two types - Unit-Linked Pension Accumulation Plans and Non-Linked Pension Accumulation Plans.

• In unit-linked plans, your money is invested in the stock market and your returns depend on market conditions.
• In non-linked plans, you get a fixed sum of money when your policy matures.

• Building A Retirement Fund

  Both plans give you an accumulated fund or a lump sum after a predefined period to cater to your retirement needs - so you can have a financially secure and comfortable life even if you aren’t earning.



• Tax Benefits*

  These plans also offer tax benefits under the Income Tax Act, 1961 -
  
  • Section 80C - The premiums you pay are exempted from taxation.
  • Section 10(10A) - The amount you can withdraw from the maturity amount is exempted from taxation.

Further, Unit-Linked Pension Accumulation Plans offer the following benefits -

• Death Benefit

  Your nominee is eligible to receive the death benefit if you unfortunately pass away during the policy term. They will receive the higher of either -
  
  • Accumulated Fund Value, or
  • 105% of the total premiums paid.



• Maturity/Vesting Benefit

  The premiums you pay are invested in various stock market funds, which determine the maturity benefit you will receive when the plan matures. You can get the higher of -
  
  • The accumulated Fund Value, or
  • A percentage of the total premiums you have paid. This percentage can range between 101% to 140%.



• Instant and Tax-Free Switching

  You may wish to switch the fund you have invested in because of -
  • Market movement
    Market conditions influence fund performance. So, if the market doesn’t perform as well as you had expected, you can switch between fund options.
  • Change in Lifestage
    You can switch your funds depending on your life stage. For instance, you can maintain an aggressive position (high on equity) while you are young and earning well, and shift to a conservative position when you hit, say, 50.
    
    And, the best part about switching is its tax efficiency.



• Transparency

  Your insurance company is expected to be 100% open and transparent about the plan you purchase. You will be given complete details about the funds your money is invested in, the charges levied, the value of the investment, past performance of the funds, etc. This ensures that you make a well-informed decision.



• You can invest based on your risk appetite

  One of the best benefits of a Pension Accumulation Plan is that you can pick where you want to invest your money, based on the level of risk you can tolerate and the returns you expect. It offers a variety of high, medium, and low risk investment options.
  
  
  • If your risk appetite is high, you can invest in equity-oriented funds. The premium you pay is invested in the equity or stock market. These funds are very volatile, but can give you high returns. You can choose among large cap, mid-cap, or small cap funds.
  • If your risk appetite is low, pick debt-oriented funds, wherein, the premium is invested in debt instruments like corporate bonds, government securities, and other low-risk investment tools. This, however, may result in a comparatively lower return.
  • You can pick a money market fund if you are looking for a short-term and liquid investment. A money market fund is a type of debt fund that invests money in short-term money market instruments like commercial papers, bank deposits, treasury bills, etc.
  • If you want a more secure investment with steady returns, go for a balanced/hybrid fund. Your premium is invested in both stock and debt markets, so you can earn balanced returns.



• Liquidity/Withdrawal

  You are also allowed to make multiple partial withdrawals from your plan before it matures, after a lock-in period of 5 years. This is especially beneficial if you need money for an urgent situation, like emergency hospitalisation, house repair, etc.

Further, Non-Linked Pension Accumulation Plans offer the following benefits -

• Death Benefit

  Your nominee will receive the death benefit if you pass away during the policy term. Depending on what is higher, they will either get -
  • The total premiums you have paid along with any accrued bonuses, or
  • 105% of the total premiums you have paid.



• Maturity Benefit

  Since these plans are not linked to the market, your returns do not fluctuate, and hence, are less risky. Depending on what is higher, you will either get -
  • The total premiums you have paid along with any accrued bonuses, or
  • A percentage of the total premiums you have paid. This can range between 101% to 140%.



• Collateral For Loans

  A non-linked pension accumulation plan can also be used as a collateral for any loans you undertake. For instance, if you plan on buying a new house, you can use the non-linked plan as a collateral for the loan.



• Bonuses

  A participating non-linked pension accumulation plan may also offer bonuses in addition to the maturity and death benefits. It offers 4 types of bonuses -
  • Reversionary Bonus
    This bonus is awarded at the end of every financial year, but won’t be given to you immediately. It accumulates under your plan on a yearly basis, and is paid along with the maturity or death benefit.
    
    Reversionary bonus is further divided into two types -
    
    • Simple reversionary bonus: It is calculated by multiplying the reversionary bonus and the guaranteed sum assured.
    • Compound reversionary bonus: It is calculated by multiplying both the guaranteed sum assured and the previously accrued bonuses with the reversionary bonus rate.
  
  
  • Terminal Bonus
    A terminal bonus, , is paid with the maturity or death benefit. This bonus is paid entirely at the insurer's discretion, so there is no guarantee that you or your nominee may receive it.
  
  
  • Interim Bonus
    Bonuses are usually declared at the end of every financial year. However, an interim bonus is paid if a policy matures or death occurs between consecutive bonus declaration dates, to ensure that you or your nominee don’t miss out on any benefits. And so, the bonus is calculated based on the remaining days from the previous bonus date.

So, these are the benefits offered by Pension Accumulation Plans. These plans are a great choice if your aim is to build a hefty retirement fund, while ensuring that your family has a safety net in your absence. Read through the plan details, benefits offered, and the documents to have an in-depth understanding of how it works and whether it’s the right fit for you! And, also have a look at the type of plan you need - in the next article.