Definition
Pension Plan
A pension (retirement) plan is a life insurance product designed to accumulate a corpus during working years and provide income after retirement.
Insurance pension plans come in deferred (accumulate then annuitise) and immediate annuity forms, and may be participating, non-par guaranteed, or unit-linked (pension ULIPs). At vesting, IRDAI rules require a large portion of the corpus to be used to buy an annuity, with limited tax-free commutation.
These plans appeal to those wanting an insurer-guaranteed retirement income stream, though their charges and mandatory annuitisation make them less flexible than NPS or mutual funds plus a later annuity. The choice hinges on the value of guarantees versus flexibility and cost.
Related terms
- Deferred AnnuityA deferred annuity is a pension product where the buyer pays premiums (lump sum or instalments) now and the regular income begins after a chosen deferment period.
- National Pension SystemThe National Pension System is a regulated, market-linked retirement savings scheme where subscribers accumulate a corpus and annuitise part of it at exit.
- CommutationCommutation is the option to take part of a pension corpus as a tax-advantaged lump sum at retirement instead of receiving it all as annuity income.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.