Pension Plan: 12 Key Definitions You Must Know

If you are looking for a retirement plan, you must know the financial terminology. You must know the key terms used with pension plans to get data on how to maximise your retirement corpus, which can affect your financial future.

Let’s discuss the common terms related to pension plans

• Pension Plan – An investment option for an income after retirement

A pension plan is any investment planning scheme that offers you with an income after retirement. At its most standard level, a pension is a tax-efficient savings plan where you cannot receive any remunerationstill you are 50. Subjectto the type of policy you have, you could receive pension payments for a definite period of time.

• Premium – The amount you invest in a policy

The premium is the amount invested towards a policy purchased from an insurance company. The premium is income for the insurer, but it also represents a liability. The insurer must give coverage for claims being made against the policy.

• Riders – Additional features you can add to your plan

‘Riders’ are optional features or benefits you can choose to combine with your pension plan at an additional price. Riders provide the option for you to increase coverage to meet your particular needs.

• Beneficiary or Nominee – The person who benefits from the policy you take

A nominee is the one who receives the Death Benefit in case of the sudden demise of the policyholder. If the nominee is a minor at the time when the policy activated, a guardian can be appointed until the nominee reaches maturity. You can also choose multiple nominees and specify the share (%) each one of themreceives.

• Accumulation Period – The time period of your pension plan

This is the tenure for which one invests in a pension plan. For example, if you get a policy that involves a monthly investment of Rs.20,000 over 20 years, the ‘term’ of 20 years is called the ‘Investing Period’.

• Vesting Age – The age at which you start receiving a pension plan

The age at which you start getting a pension in an insurance-cum-pension policy is known as the ‘Vesting Age’. For almost all pension plans, the vesting age does not come into play until the annuitant is 55 years old.

• Fund Value – The premium amount pending at the end of your investing period

The total amount pending to you at the end of the approved period of investment is called the Fund Value. Some policies have a pre-defined fund value at the end of the investing period. For a pension plan that invests in the stock market, the fund value is the collective value of investments made on the day of the policy’s maturity.

• Maturity Benefit – The amount you receive at the end of your investing period

The total amount you are liable to receive at the end of the investing period is known as the ‘Maturity Benefit’. Asubstitute term for this is ‘Annuity Benefit’. In case of equity-linked pension plans, the higher value among the Fund Value and Guaranteed Maturity Benefit is the Maturity Benefit.

• Loyalty Benefit – The amount an insured receives for keeping their plan through the investing period

The incentives given to the policyholder for keeping a policy activethrough the investing period is known as the ‘Loyalty Benefit’, given your premiums are on time and up-to-date.  This benefit is a portion of any monetary extras of the insurance company after evaluation, which is shared with the insured. This amount, generally a percentage of the sum assured.

• Death Benefit – The amount a beneficiary receives

The payable amount on a pension plan to the beneficiary of the plan when the policyholder dies while the policy is still active is called the Death Benefit. All pension plans offer a Death Benefit, though the quantum and structure of the reimbursement. Payment to nominees could be a lump sum, or as a continuance of monthly or annual payments paid to them.

• Transfer Value – The amount you receive when all charges and penalties are deducted

The current investment value and projected future value of your pension plan are important to you, but the amount you receive when all charges and penalties have deducted must be seriously considered if you move your plan elsewhere. This will provide a more realistic representation of the current position of your pension plan.

• Annuity – A type of insurance plan that enables you to receive a series of annual sums

An ‘Annuity’ is an agreement between the policyholder and the insurer. In return for your premium, the insurance company agrees to provide either regular payments, withdrawal up to a certain percentage annually, or even a lump sum payment after some time. 

Before you decide on investing in pension plans, the familiarity of these key terms will help you comprehend the features of various types of pension plans and also help you make an informed decision.