DYK: What lock-in means for a pension plan
2 min read . Updated: 01 Jan 2014, 06:42 PM IST
PremiumIn a pension plan the lock-in periods are usually till your retirement age
In a financial product, the term “lock-in" means that you can’t pull out your money for a certain period. You would be familiar with lock-ins in mutual fund schemes that give you tax benefits under section 80C. In equity-linked savings schemes (ELSS; a type of a mutual fund), you need to lock in your money for three years. In a unit-linked insurance plan (Ulip), you need to lock in your money for five years. But in a pension plan, such as the National Pension Scheme (NPS) or pension plans offered by life insurance companies, the lock-in periods are much longer, usually till your retirement age.
Since pension plans need you to lock in your money for a longer duration, you need to understand these products and their implications on liquidity even better than products that have shorter lock-in periods. Read on to understand how lock-ins work in pension plans.
National pension scheme
You need to invest every year in NPS. When you reach 60 years of age, you are allowed to withdraw up to 60% of that accumulated corpus. From the remaining money you need to buy an annuity, which is a pension product that gives regular income.
In that sense, the lock-in under NPS is till the age of 60. So what happens if you want to withdraw before that? The scheme’s design is such that it discourages premature withdrawals by mandating that 80% of the money has to be annuitized and that you can pocket only 20% as lump sum. However, the PFRDA Act, 2013 (which governs NPS), allows the scheme to permit partial withdrawals for certain events or emergencies. The details are still awaited.
Unit-linked pension plans
There is a lock-in of five years in unit-linked pension plan. This means you can’t pull out your money before five years. Even after that, regulations have made it tougher to withdraw the money before the plan matures. Now, you need to buy either a single-premium pension policy or annuitize at least two-thirds of the corpus in case of a premature withdrawal.
On maturity, you can keep up to one-third of the accumulated amount and annuitize the rest. Unlike NPS, where lump sum withdrawal is taxable, a similar withdrawal in unit-linked pension plans is tax-free.
Employees’ provident fund
This is a pension product for the salaried and is partially funded by the employer. In Employees’ Provident Fund (EPF), too, the money is available to you on retirement, but the system allows for partial withdrawals in case of certain events such as a medical emergency or for housing.
The lock-in here is not watertight because EPF doesn’t keep track of individuals; it recognizes the employee through the employer. So, when employees move from one company to another, they are able to withdraw from EPF because the rules allow for withdrawals in case of unemployment for more than two months.
