Pension Plans by Life Insurers — Guaranteed vs Market-Linked

Two phases: building and paying

A pension plan from a life insurer has two phases. In the accumulation phase, during the working years, premiums build a corpus. At vesting, the corpus is converted into regular income by buying an annuity. A plan of this kind is a deferred annuity: the income begins after the accumulation period, not at once.

The vesting age is the age at which that conversion happens. Each plan's terms state the range of vesting ages it permits, and the policyholder chooses an age within that range when buying the plan. The permitted range differs from one product to another.

Non-linked and unit-linked plans

A non-linked (traditional) pension plan credits guaranteed or declared returns. Where the plan guarantees a return or a maturity value, the insurer has to honour it however its own investments perform, so the insurer carries the investment risk on what it guarantees.

A unit-linked pension plan invests in market-linked funds chosen by the policyholder. The fund value moves with the market and the policyholder carries the investment risk. A unit-linked plan carries a five-year lock-in, and a benefit illustration for it shows values at assumed gross returns of 4% and 8% a year, which are illustration rates and neither a guarantee nor a forecast.

Neither structure is better in itself. They place the investment risk on different parties, and they differ in what is promised in advance.

The rule at vesting

Both kinds of plan are governed by the IRDAI (Insurance Products) Regulations, 2024, which replaced the 2019 product regulations, and by the Master Circular on Life Insurance Products of 12 June 2024.

Under that circular, the policyholder may commute, that is take as a lump sum, up to 60% of the proceeds at vesting. The rest must be used to buy an annuity. Older material quotes one-third as the limit. Commutation is a ceiling and not an obligation: a smaller share, or nothing, may be commuted, which leaves more to buy an annuity.

The same routing applies on surrender: the proceeds are not simply paid in cash, but may be commuted up to 60%, with the rest buying an annuity.

Tax in outline

A contribution to an insurer's pension plan falls under section 123 of the Income-tax Act, 2025 (the old section 80CCC is mapped to it), inside the combined ₹1.5 lakh limit and under the old tax regime only.

The annuity is fully taxable as it is received. How the commuted lump sum is taxed is a separate matter under the Income-tax Act, 2025; the IRDAI limit of 60% says how much may be taken, not how it is taxed.

Rules at a glance

Key points

• An insurer's pension plan accumulates a corpus and converts it into income at vesting.
• The vesting age is chosen by the policyholder within the range the plan allows.
• In a non-linked plan the insurer bears the investment risk on what it guarantees; in a unit-linked plan the policyholder bears it.
• Up to 60% of the vesting proceeds may be commuted; the rest must buy an annuity.
• Older material quotes one-third as the commutation limit.
• The annuity bought at vesting is fully taxable.

Common misunderstandings

• The commutation limit is not one-third any more: IRDAI's Master Circular of 12 June 2024 allows up to 60%.
• A pension plan cannot be taken wholly in cash at vesting: whatever is not commuted must buy an annuity.
• A guarantee in a non-linked plan does not mean the plan has no investment risk: the risk on the guaranteed part sits with the insurer instead of the policyholder.
• The vesting age is not one fixed age set by the regulator: it is chosen within the range each plan allows.

Questions people ask