Pension Plan: Type of Pension Plans and Their Tax Benefits

A pension or retirement plan is a type of investment plan that enables a person to allocate a portion of their savings towards long-term goals. This helps to mitigate the uncertainties of post-retirement life through a regular income stream after retirement.

Pension plans provide you with financial security so that when your professional income starts to ebb, you can still live with pride without compromising on your living standards. Given the high cost of living and rising inflation, retirement planning has become more important. Depending on the goal behind your retirement planning, you can choose between various types of pension plans.
 

Different Types of Pension Plans

There are different types of pension plans that you can choose to multiply your savings. Very importantly, before choosing an appropriate type of pension plan, you must first prioritise your financial goals.

According to your long-term financial goal, you can choose one of the types of pension plans given below:

• Immediate Annuity Plans:
  
  
  1. Single investment plans
  2. Annuity income starts immediately after depositing money.
  3. You can buy for a limited income tenure, for example, 10 years
  4. Invest for a lifetime income.
• Deferred Annuity:
  
  
  1. Single or regular premium options.
  2. The annuity starts after a few years of the investment.
  3. Limited and lifetime income options.
  4. Bonus additions for long-term investors.

Note: You can consider the Pension4Life Plan by Canara HSBC Life Insurance if you want a guaranteed lifelong income after retirement. It offers multiple annuity options, like single or joint life, immediate or deferred with flexible payout modes. 

• Pension Plans With Life Cover:
   
  1. Provide insurance coverage along with retirement savings.
  2. Offer a lump sum to nominees in case of your untimely demise.
  3. Ideal for individuals looking to secure both retirement and their family’s future.
  4. Most life insurance-based pension plans include life cover by default.
• Pension Plans Without Life Cover:
  
  
  1. Focus solely on generating retirement income without any death benefit.
  2. Suitable for individuals who already have separate life insurance protection.
  3. Generally offer higher returns or flexibility, as no premium goes toward life cover.
  4. Often preferred for creating predictable, long-term post-retirement income

Pension plans like senior citizen saving schemes and monthly income plans from mutual funds, etc., do not provide a life cover. However, you can use them to create your post-retirement income.

• ULIP
  
  
  1. ULIPs allow partial withdrawals after five years.
  2. Bonus additions for long-term investors.
  3. Start early, build your corpus with equity funds, and draw a tax-free pension after retirement from the same plan.

Note: You can consider Promise4Growth Plus by Canara HSBC Life Insurance. These plans are designed to help you build long-term wealth while protecting your family with life insurance. These plans are particularly effective for essential financial goals like your child’s education or marriage.

Tax Benefits in Pension Plans

Pension plans offer the following tax benefits in India:  

• Benefit Under Section 80C:
  
  
  1. Annual investment amount eligible for deduction up to ₹1.5 lakhs
  2. Additional deduction of up to ₹ 50,000 for specified investments.
• Tax-Free Growth
  
  
  1. Accrued interest in the pension plans is free from taxation.
  2. Withdrawals of interest before maturity will also be free from tax for plans.
• Tax-Exemption of Maturity Proceeds
  
  
  1. Maturity proceeds from a life insurance pension plan would be tax-exempt if investment conditions have been met.

Tax-Free Pension

• Start investing up to ₹ 2.5 lakhs every year at the age of 30.

• Make sure your life cover under the policy is always 10 times your annual investment.

• Allocate to equity funds and debt funds, and use portfolio strategies to automatically manage the folio.

• Stop investing at the age of 60 and apply for a systematic withdrawal.

• Start drawing a tax-free pension.

If you are buying the plan on or after 1st Feb 2021, just ensure your total investment into all such ULIPs never exceeds ₹ 2.5 lakhs a year.

How to Select a Pension Plan?

While you choose to buy a pension plan, you must be clear about your financial goal. You must go with a pension plan that is appropriate for your particular goal. Here are the different goals that  you need a suitable type of pension plan for:

• Regular Income after Retirement: Regular income post-retirement means you need a safe investment option, which can:
  
  
  1. Guarantee a long-term income stream.
  2. Life cover or income continuity for the spouse after your death.

Note: iSelect Guaranteed Future Plus by Canara HSBC Life Insurance is a savings-cum-protection plan that offers guaranteed returns and flexible income options. You can choose between lump sum, regular, or early income benefits. It Ideal for disciplined, goal-based financial planning.

• Wealth Maximisation Goal: If building a huge retirement corpus before you retire is your goal, you need something which:
  
  
  1. Allows you to invest aggressively.
  2. Has active portfolio management options.
  3. Offers a long-term (possibly lifetime) holding option.

How to Buy the Best Pension Plan?

Here are the factors that you must consider while buying a pension plan:

• Investment Portfolio: Depending on your age and time before retirement, you can select an aggressive or safe mode of growing your money. Thus, the plan has to offer the best of what you need.
  

• Portfolio Management & Systematic Withdrawal: If you are looking to invest aggressively, portfolio management will become an important feature for you. Even if not investing aggressively, you do not want to be involved in managing the withdrawals from the plan. Thus, the systematic withdrawal feature is also important.
  

• Maximum Maturity Age: The preferred maturity age would be 100 or life with a pension plan. However, you can choose a plan as per the income period you are looking for.
  

• Bonus Additions: Bonuses offer additional growth to your retirement corpus. Thus, if bonuses are available for staying invested for a long period, it helps improve your corpus and income.
  

• Tax Benefits: The pension plan investment should be eligible for an 80C deduction. While the maturity benefits should be exempt from tax. Usually, both benefits are only available with life insurance pension plans.

Note: Tax benefits are subject to change in tax laws. Please consult your tax advisor
Thus, select the right pension plans and enjoy your retirement period with prosperity.

Conclusion

Pension plans in India help you build a secure, tax-efficient retirement income. With options like immediate or deferred annuity, ULIPs, and guaranteed income plans, you can align your investment with life goals. Choose wisely based on your needs, and enjoy financial independence post-retirement with Canara HSBC Life Insurance.