Deferred Pension - Definition, Benefits & Types

When you invest in any pension scheme or an insurance policy that offers annuity benefits, you have the option to choose between an immediate pension or deferred pension. In an immediate pension scheme, as the name suggests, you start getting the pension immediately after you invest a lump sum amount. However, in deferred pension schemes, you either get a lump sum amount after a specific period or on a specific date in future or you get a regular income for a specific period as per the contract.There are different types of deferred pensions, which are discussed below

In fixed deferred pension schemes, you get a fixed pension amount based on the corpus you build over the years. However, in such schemes, you would know of a minimum pension that you would receive in the future when you start investing. Although you may receive a higher amount than the minimum decided pension, it cannot be less than the minimum agreed amount.But in these schemes, the interest payment gets deferred until you withdraw the amount in a lump sum from your corpus. If you don’t want to withdraw the interest savings and want to save it for future purposes, a fixed deferred pension plan could be the best investment option for you.

In these schemes, the funds are kept in an investment account and according to your risk-taking capacity, age, and other factors, the amount is invested in different assets like stocks and bonds.In variable deferred pension, the pension, and the returns you get varies based on the performance of the assets in your portfolio. A significant feature of this type of pension scheme is that it allows you to purchase riders to enhance your coverage and get additional benefit from it.

The indexed deferred pension is also commonly referred to as equity-indexed equity and they are a combination of both fixed and variable deferred pension. Some investors consider it as a fixed deferred pension as it assured a minimum guaranteed returns and pension like the fixed deferred pension schemes.However, one of the unique features of this pension is that it allows you to link to your earnings with a return-based formula in a market index.

This type of pension is considered to be one of the best types of pensions. It acts like a lifetime income that pays you a pension throughout your life. You can use the amount to meet your regular expenses and keep your savings intact. Generally, most longevity deferred pension schemes in India offer tax deferred payment till you are 85 years of age.

When you invest in a deferred pension scheme, you withdraw the money from your accumulated corpus either partially or fully to the maximum limit that the pension scheme permits at any time you want. You can also transfer the amount to some other account as per your needs. Let us look at some other benefits of deferred pension plans.

Multiple payout options

You can choose from the different payout options that the scheme or the insurance company offers in terms when you want to buy the annuity.

Delay in payment

In deferred pension schemes, the annuity is usually paid after completion of the deferred phase. This means you must wait before taking any action payment on annuity. In deferred annuity, you can wait till as long as you want to purchase annuity and start taking the pension or you can take the payment in a lump sum as per your convenience.

Flexibility to add funds to your deferred annuity

Before you purchase annuity, you must go through the accumulation phase or the investment phase. In this phase, you keep investing or adding funds to your pension account. Based on the plan you are investing in; you can invest a lump sum amount or invest periodically. However, you must follow the investment rules during the accumulation phase and be diligent with your investments so that you can accumulate a robust corpus and draw a decent pension at a later stage.

Flexibility to withdraw funds

After the accumulation or the investment phase is over, the payout phase begins. In this phase, you can get the pension after your pension plan matures or when you reach the age of 60 years. At this stage, even if you withdraw funds from your account partially, you need not incur any penalty fees.Also, most deferred pension plans give you to option to choose different ways to receive funds, which are discussed below:When you choose to receive the pension in lump sum amount then it may be taxable and you must pay a tax on the amount as per your tax bracket.You can also consider withdrawing the funds through systematic withdrawal. In this method, you receive the pension in smaller installments periodically.

Now that you are aware of the different aspects of deferred pension plans, you can make an informed investment decision.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.