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How Do Pension Plans Work? - Details and Features

March 07, 2017 1580
Taking up a pension plan is one of the easiest ways to secure the golden years of life. However, before buying a pension plan, it is important to be acquainted with its working and features.

How Do Pension Plans Work?

Pension plans in India are structured into two parts i.e. accumulation and distribution. The premium paid towards a pension plan is invested in a fund/asset of your choice for a pre-determined period. After the plan attains maturity, you will start receiving the pension benefits, which is also known as vesting. At the time of vesting, you will have two choices. You can either start receiving the pension benefits or withdraw the proceeds and purchase an immediate annuity plan from the same company. Here are some of the compulsory features of pension plans in India:-

Guaranteed Maturity Benefit

All pension plans in India provide guaranteed maturity benefit. This is the reason why pension plans in India are also known as guaranteed pension plans. The maturity benefits are generally the fund value or 101% of Premium paid, whichever is higher. Guaranteed pension plans are a safe and lucrative investment that will provide value for your hard-earned money.

Guaranteed Death Benefit

If the premiums are paid regularly without any breaks in between, a pension plan will carry a death benefit. The death benefit will be equal to 105% of the total premiums paid including all the top-ups if any. This amount will be paid out to the beneficiary/nominee in the event of the untimely death of the policyholder. However, if the pension fund is discontinued due to some reason, the funds already accumulated in the policy will be given to the beneficiary.

A Nominee Can Utilize Pension Funds in Three Ways

A nominee has three choices to utilize the pension funds:-

  1. Withdraw the entire death benefit
  2. Buy an immediate annuity plan with the entire proceeds
  3. Partially withdraw the proceeds and use the balance amount to buy an annuity plan.


Earlier, your pension plan would be forfeited if you don't pay the premium regularly for at least 3-5 years. However, the rules have changed at present. Now you can choose to surrender or discontinue your pension plan whenever you want to. However, if you discontinue the plan, a specified charge will be deducted from the fund value. A discontinued fund will also continue to earn 4% p.a. and you can withdraw the accumulated funds after 5 years. On the other hand, if you surrender a pension plan within 5 years, the proceeds have to be utilized to buy an annuity plan (immediate or deferred).

Related Article:

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