Vesting & Surrender — Rights, Lock-in & IRDAI Regulations

Vesting: when saving turns into income

Vesting is the point at which a pension plan's corpus is converted into retirement income. In an insurer's pension plan the vesting age is chosen by the policyholder within the range the plan's terms allow.

At vesting, up to 60% of the proceeds may be commuted, that is taken as a lump sum, and the rest must be used to buy an annuity. If the proceeds are too small to buy the minimum annuity, they may be paid as a lump sum.

Surrender: leaving before vesting

Surrender means ending the policy before vesting and taking its surrender value. Under IRDAI's Master Circular on Life Insurance Products of 12 June 2024, a special surrender value becomes payable on a regular-premium non-linked savings policy after the first policy year, once one full year's premium has been received. It must be at least the present value of the paid-up benefits.

A pension plan is meant to end in an income, and the rules keep it that way. Surrender proceeds on an individual pension plan are used in the same way as vesting proceeds: up to 60% may be commuted and the rest must buy an annuity. Surrender does not turn the whole corpus into cash.

Unit-linked pension plans: lock-in and discontinuance

Unit-linked plans, including unit-linked pension plans, carry a five-year lock-in. A policyholder can ask to surrender earlier, but the proceeds are paid only once the lock-in is over.

If premiums stop during the lock-in, the fund value moves to a discontinued policy fund, which must earn at least 4% a year; that is a floor, not a fixed rate. The policy can be revived within three years of the first unpaid premium. If it is not revived, the proceeds are paid at the end of the lock-in, or at the end of the revival period if the policyholder had opted to revive and that date is later.

Vesting in the NPS

The National Pension System has its own rules, made by PFRDA and amended in December 2025. A non-government subscriber vests after 15 years or at age 60 and may stay invested up to age 85; older material gives 70. How much may be taken as a lump sum at exit is a separate PFRDA rule and differs for government and non-government subscribers.

Rules at a glance

Key points

• Vesting converts a pension plan's corpus into retirement income; the vesting age is chosen within the range the plan allows.
• At vesting or on surrender of an insurer's pension plan, up to 60% may be commuted and the rest must buy an annuity.
• Proceeds too small for the minimum annuity may be paid as a lump sum.
• A special surrender value is payable after the first policy year once one full year's premium has been received.
• A unit-linked pension plan has a five-year lock-in; premiums stopped within it send the fund to a discontinued policy fund earning at least 4% a year.
• A discontinued unit-linked policy can be revived within three years of the first unpaid premium.

Common misunderstandings

• The five-year lock-in does not bar a surrender request before five years: the request can be made, but the proceeds are paid only once the lock-in is over.
• Surrendering a pension plan does not release the whole corpus as cash: surrender proceeds follow the same commutation and annuity rule as vesting proceeds.
• The 4% on a discontinued policy fund is not a fixed rate: it is the minimum the fund must earn.
• Missing a premium during the lock-in does not end the policy for good: it can be revived within three years of the first unpaid premium.

Questions people ask