A pension plan or an annuity is an investment that is made either in a single lump sum payment or through installments paid over a certain number of years, in return for a specific sum that is received every year, every half-year or every month, either for life or for a fixed number of years.
Annuities differ from all the other forms of life insurance in that an annuity does not provide any life insurance cover but, instead, offers a guaranteed income either for life or a certain period.
Typically annuities are bought to generate income during one's retired life, which is why they are also called pension plans. By buying an annuity or a pension plan the annuitant receives guaranteed income throughout his life. He also receives lump sum benefits for the annuitant's estate in addition to the payments during the annuitant's lifetime.
Pension plans are perfect investment instrument for a person who after retiring from service has received a large sum as superannuation benefit. He can invest the proceeds in a pension plan as it is safest way of secured income for the rest of his life. One can pay for a pension plan either through an annuity or through installments that are annual in most cases.
Types of Annuities / Pension Plans
Guarantees you a specified amount of income for your life. After death, the amount invested is refunded to your nominee.
Guaranteed Period Annuity:
Provides specified income for your lifetime and guarantees that your nominee will receive payments for a certain minimum number of years, even if you should die earlier. In case you live longer than the specified minimum number of years, you are entitled to recieve annuity payments for your lifetime.
Under this plan, the stipulated annuity is paid for a fixed number of years. The annuity payments stop at the end of that period, irrespective of how much longer you may live.
The premiums paid into such plans may be deducted from one’s taxable income at the time of payment. In addition, the interest earned on the annuities is not taxed immediately. But the proceeds of the annuity will be taxable when they are paid to you.