Pension Schemes in India: Meaning and Advantages

1-June-2021 |

Pension plans, also known as retirement plans, are plans that help you set aside a portion of your income throughout your income-earning years (called premium) to build a monetary reserve (corpus) that will provide you financial support (annuity or pension) in your golden years. Being prepared for the post-retirement phase is extremely important. The primary  purpose of pension plans include giving an individual access to the same lifestyle they had in their income-earning yearsTo know which type of pension systems suit you best, you need to learn about the different types of pension schemes. 


Before we proceed, a quick look at


What are the different types of pension plans?


Based on the type of payout they give to a pensioner, there are 4 types of pension plans.


1. Immediate annuity pension plan

In this type of pension plan, the pensioner invests the premium amount in a lump sum (at one time). After this, the pensioner receives the annuity (pension) amount immediately after paying the lump sum, in monthly, quarterly, half-yearly or yearly payouts. In case of the pensioner’s death, his/ her nominee receives the annuity payout.


2. Deferred annuity pension plan

In a deferred annuity pension plan, the pensioner can choose between paying a one-time payment of the premium or regular instalments of the premium over the term of the policy. During this period, the premium that the pensioner pays accumulates and gathers interest on it as well. After the end of the policy term, the pensioner gets a regular payout, creating a fixed stream of income. 


3. Unit-linked pension plans

In Unit Linked pension plans, the premium paid by the pensioner is invested by the insurance company in low to high-risk investment avenues such as bonds, stocks and securities. So the annuity paid to the pensioner at the end of the policy term is higher. However, this depends on the returns you get and is subject to market risks. To be on the safer side, you can even choose to invest your premium in low-risk avenues like in government securities. This way, you get a fixed return at the end of the policy term and avoid high market risk.


Employer Pension Plans in India


Apart from traditional pension plans and unit-linked pension plans, there are also types of pension schemes that are implemented by the Government of India.


1. National Pension Scheme (NPS)



The National Pension Scheme is a social security scheme for policyholders who are risk-averse. Under this scheme, a policyholder’s premium is invested in safe avenues like equity, debt, government bonds, etc. A policyholder can choose to withdraw 60% of their corpus in a lump sum manner when they turn 60 years and receive the remaining 40% as regular annuity payments. Any citizen of India between the ages of 18 to 65 years of age can invest in this scheme.


2. Employees’ Pension Scheme (EPS)


The Employees’ Pension Scheme is specifically created for government employees who are registered under the Employees Provident Fund Organization and have rendered continuous government service for a period of 10 years. Under this scheme, the employer of the pensioner makes all the payment of the premium towards the scheme from the employee’s salary every month. At the end of the policy term or retirement, the pensioner gets pension benefits at the age of 58 provided they retire.

Tata AIA’s two types of pension systems*


Tata AIA understands the value of stability, peace, and reinvention during your golden years. To help you prepare for your life post-retirement, it offers two types of pension schemes:


Tata AIA Life Insurance Smart Annuity Plan (UIN: 110N150V05)


This plan offers:


  • Flexible annuity options – Immediate life annuity (with/ without return of purchase price) and Deferred life annuity with return of purchase price
  • The option to choose a single or joint-life annuity payout
  • Flexible annuity payout options
  • The option to enhance annuity payout

Tata AIA Life Insurance Guaranteed Monthly Income Plan (UIN: 110N147V02)


This plan offers:


  • A policy term of 5, 8 or 12 years
  • Guaranteed1 monthly income for twice the policy term
  • Life coverage for your loved ones
  • Optional riders# and tax benefits@
Advantages of the different types of pension systems


There are several advantages of the different types of pension schemes:


1. Financial protection

You are assured of a regular and steady flow of income post-retirement, ensuring optimum financial protection at a time when you need it most. You are also protected from the effect of inflation due to the accumulation of compound interest.


2. Power of choice

Under a pension plan, you can choose the type of scheme you want, the type of investment avenues you want to invest in, the magnitude of risk you want to take, and the term of premium payment and annuity payout you want to receive.


3. Tax benefits

Investing in a pension plan gives you several tax benefits under the Income Tax Act, 1961. The premium paid by you qualifies for tax deduction up to an amount of ₹1,50,000 under section 80C, 80CCD, etc. depending on the type of plan.



How much should you save for your retirement today?

The amount you need to save for your retirement now is dependent upon a lot of factors, such as:


  • Your current age
  • Your monthly income
  • Your current expenditure management
  • Your sources of alternate income
  • The prevailing rate of inflation
  • Your target amount you need post-retirement
  • Your choice of lifestyle post-retirement

These calculations can get difficult if you are unaware of how to go about adding or subtracting certain factors. Here, one thing that can truly help you determine your retirement fund contributions is a Retirement Calculator.


A Retirement Calculator is an online calculation tool that provides you with an approximate amount to save at any given point of time to earn desired sum after retirement by taking into consideration specific financial and lifestyle conditions.


You can check out the Retirement Planning Calculator offered by Tata AIA Life Insurance. Simply input a few necessary details and get the amount you need to save for your retirement




Final Word


Before buying a pension plan, you need to assess your financial requirements, estimate your future expenses and decide how much you can allocate towards a plan in the present. It is best if you think about your post-retirement financial plan at an early age, as you can accumulate a higher corpus and avoid paying a higher rate of premium. This way, you reduce your financial burden in the long run.



Need help to choose the right plan?


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  • This document is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. This document is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
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  • Every effort is made to ensure that all information contained in this document is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material
  • # Rider is not mandatory and is available for a nominal extra cost. For more details on benefits, premiums and exclusions under the Rider, please contact Tata AIA Life's Insurance Advisor/ branch.
  • @ Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implication mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.
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  • 1 Guaranteed Returns/Payouts depend on Plan Option, Policy Term, Premium Payment Term and Age at entry
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