Basic Structure of Pension PlansThere is a level of ambiguity in the usage of word ‘pension plan’ in India. Most of the schemes that have the word pension in them are in fact ‘accumulation plans’. The ‘investor’ – if you can use that word – makes periodic purchases to build up a corpus. During the accumulation period, the investments are managed by the scheme provider to generate a level of returns. At the time of retirement, the distribution phase begins. The final corpus is a combination of the purchases and the returns. This corpus – or a part of it – is actually used to buy an annuity. It is this annuity that actually provides a pension! This picture from https://www.basunivesh.com provides a pictorial view of the phases. When you buy a pension plan, you are forced to buy an Annuity Plan at some point of time. This article has more information on annuity plans. Annuity Plans – What, Why, and Why Bother Another view of this with specific reference to NPS is provided by this freefincal article.
Disadvantages of pension plans
No estimate of annuity amount
At the end of the accumulation period, you have to buy an annuity to get the pension. The pension amount depends on the situation at that time. There is no way to project what the actual pension would be. This has to be the biggest disadvantage of the pension plans in India. You can and do get an estimate of how the corpus grows during the accumulation period. However, you have no way to secure a particular pension amount in the distribution period.
The annuity plans are not exclusive at all- any one can walk in with a cheque and buy the annuity. Of late, some annuity plans provide a small discount for NPS subscribers in terms of annuity payment.
The pension amount is taxable. In my opinion, this is unlikely to change. Depending on the pension plan, the investments and returns can be exempt. But this is sub-optimal when the withdrawal is taxed. You can read more here.