Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Money / Calculators/  Pension plan’s objective is to give income during retirement
BackBack

Pension plan’s objective is to give income during retirement

Life insurance companies offer insurances under various categories

iStockPhotoPremium
iStockPhoto

I have invested in a pension plan. This was for 10 years with an annual premium of 1.5 lakh. It matures in April 2015 and will give me about 23 lakh. As I understand, I can withdraw a third of the amount without being taxed. The remaining amount will be converted to an annuity, which is taxable. If I surrender the policy before maturity, the fund value given to me would be taxable. Could you explain the taxation aspect on the annuity and the surrender values?

—Pradip

Life insurance companies offer insurances under various categories. The insured or an investor can pick the same based on their personal choice and requirements. There are conventional products where there are few options, i.e. endowment, money-back, whole-life plans. And there are plans that specifically provide for your retirement. These are called pension plans. The basic difference between the two is, in conventional plans, the insured wants to protect her family from financial crisis in case of her death, while pension plans provide for the opposite—creating a source of income after retirement of the annuitant.

Some plans offer returns linked to markets—unit-linked insurance plans, or Ulips. These can be used for both as conventional and as pension plans.

A pension plan’s objective is to provide a steady source of income at the time of retirement. There are various combinations available that can be considered— annuity for a specific number of years, life annuity (pays annuity for your life), life annuity with return of premium, joint-life last survivor (annuity continues after death of the holder and in the name of the spouse), and joint-life last survivor with return of purchase price (in the case of death of holder as well as spouse, the premium is paid back to nominee).

These options can help an annuitant plan for the future. But you need to be careful when picking from the above options as the annuity amount decreases the longer you want annuity to continue. For example, in a plan that pays annuity for life, the amount paid out will be higher than the amount in a joint-life last survivor plan. And the latter will be more than the amount paid in a plan that offers joint-life last survivor with return of purchase price (as you expect the insurer to return the premiums paid).

At the time of maturity, the annuitant can commute a third of the pension, which is exempt from tax. The balance can be converted to an annuity amount, and is taxable under the head “income from salary" at your marginal rate of tax. This works well for many annuitants as in the years post-retirement, their gross income stands reduced and hence, the tax impact on the annuity is not significant. However, this structure may be rigid for investors who want the maturity amount in one go.

If a policy is surrendered before maturity, surrender amount is taxable.

Queries and views at mintmoney@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 08 Dec 2014, 06:48 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App