What are Pension Funds - Types, Stages, Taxation, Difference with Mutual Funds

Gaurav Seth
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Gaurav Seth

A pension fund can be termed as any scheme, plan, or fund that aims to provide retirement income to the investor. These are pooled monetary contributions from pension plans set by unions, employers, and other entities to provide their employees with retirement perks. These are managed by professional fund managers and inculcate the institutional investor sector along with the investment trusts and insurance companies. 
The ever-growing inflation makes it significant to invest in these plans. Even if you are someone who has decent savings in your bank still it is better to invest in pension funds as savings can vanish in case of any emergency or contingency. An ideal pension fund will support you when all your streams will close. 

In simpler words, Pension funds can be termed as retirement funds or plans where you invest a small portion of your income with the objective of generating an income when you retire and in need of a regular pension. 


Pension plans are part of pension funds or you can say a kind of fund to which a specific amount from your income is invested during the tenure of your work. The investment made here further assists in withdrawing payments during the retirement period. Most often these plans are also called benefit plans because of the future benefit they provide to senior citizens to financially secure their future. Also, these plans also help you to overcome any other uncertainties that may evolve in the future. 

With the rising inflation and increasing cost of living in India, it is important to not only be financially secure while working but also plan for retirement as this will lead to a happy life without compromising the living standard post-retirement. 

It can be seen that pension plans are clubbed with insurance cover. These are usually a long-term plan requiring monthly or quarterly investments. After regularly paying the amount for a fixed tenure, you will enjoy the benefits post-retirement. 


There are different types of plans which are as listed:

  1. Plans that invest in both debt and equity, i.e. unit-linked.
  2. Plans that are sponsored by an insurer and are ideal and best suited for conservative investors as they invest solely in debt.
  3. The NPS (National Pension Scheme), which invests in two modes. The first one is Active Choice in which investors have to decide the allocation in different asset classes and the second one is Auto Choice where the investors do not need to decide any allocation.


While planning for retirement, we often go forward with the basic and common pension plans which are available. But, if we talk about them in detail, they lack a lot of liquidity and you can not rely on them in times of emergency. Here, what investors can do is invest in mutual funds with a vision of retirement planning. This will give them two major advantages, first is the returns on mutual funds will prove to be higher than other banking and insurance products and the second one is that they will offer much liquidity because they can be redeemed at any time. 

Some of the prominent funds and way you can invest in are as follows:-

1. ICICI Prudential Freedom SIP Plan:

The ICICI prudential freedom SIP is a plan that has been launched by ICICI Prudential Mutual Fund facilitating investors with a feature that helps them achieve their long-term financial goals for retirement. The investor is encouraged to invest through SIP in a disciplined manner for a pre-decided time period. At the end of the investment horizon, the corpus is switched to a target fund and the investor can enjoy cash flows through an SWP (Systematic Withdrawal Process). The withdrawals can be 1x,1.5x,2x or 3x of the monthly investments depending upon the tenure SIP chosen by the investor.  

2. SBI Retirement Benefit Fund

It is a retirement solution-oriented plan. The scheme invests in equity, debt & money market instruments based on the sub-plan of the plan. The scheme has a lock-in period of 5 years or till retirement age, whichever is earlier.

Different plans available under the scheme are:

  1. Aggressive Plan
  2. Aggressive Hybrid Plan
  3. Conservative Hybrid Plan
  4. Conservative Plan

C. Mutual Funds:

For the purpose of retirement planning, investors can also go forward with creating a long-term portfolio of different mutual funds which explores equity predominantly along with slight exposure to debt. This will help to invest in a disciplined way through SIP and earn good returns. At the time of retirement, you can switch to a stable debt fund and activate an SWP plan to receive regular cash flows. You can discuss this with your financial advisor and use his services to execute this in the most effective manner. 


1. Vesting Age:

Vesting Age is the age when you start receiving a monthly income as a pension. The minimum age for this in most schemes is between 40 to 50 years and the maximum age can be even 75 years. Investors can decide at which age they want to receive a pension.

2. Surrender Value:

Every scheme has a maturity date. It is very significant to wait for the scheme you have bought to complete its maturity so you can get the maximum advantage from it. There may be times when an individual would want to surrender due to some emergency or contingencies and this can be done and they will still receive the surrender value provided the scheme has crossed the minimum tenure. 

3. Regular Monthly Income:

Most schemes offer investors a fixed and regular income post-retirement. A scheme like immediate annuity allows you to get annual or monthly income as soon as you make an initial deposit. The pension can be paid either until death or a fixed tenure. This also depends on the plan you opt for. 


Pension funds include 2 stages. The first one is the accumulation stage and the second is the retirement stage. 
In the first stage, i.e. accumulation, you invest a certain part of your income in the pension fund till the time you retire.
And in the second stage, i.e. retirement or vesting, you start to receive your monthly income as a pension until death. 


1. Long-term planning:

As we discussed, these are schemes and plans which help you to invest with an aim to financially secure your life post-retirement so that there is no compromise in the living standard due to inflation. These funds assure you with a regular income as a pension and have a very long-term vision. 

2. Helpful in case of contingencies:

In case of some sudden contingency or emergency, you are allowed to receive a lump sum payout by making few adjustments in the scheme. This can prove to be really helpful in difficult times. 

3. Option in Investment:

Pension funds give you the liberty to choose where you want to invest your hard-earned money. You can go forward with investing in either debt and equity by having some exposure to risk or be totally safe by opting for government securities.  

4. Beating Inflation:

It is an effective way of beating the effect of inflation by investing in pension funds. 

In the case of NPS, the fund allows a lump sum withdrawal post-retirement which can be a maximum of 60% of the accumulated corpus, and the remaining part is used to make regular cash flow as pension through an annuity scheme. 


The amount contributed to these plans or funds are tax-exempt upto a maximum of Rs 1,50,000 under section 80CCC of the Income Tax Act, 1961. The amount contributed includes the amount spent on buying a new plan or renewing an existing plan. 

For ULPP(Unit-Linked Pension Plans)
The withdrawals from the funds are not tax-free, only the 1/3rd corpus which is distributed at retirement is tax-free. 
The remaining money which is distributed in installments to the investor as an annuity is taxable according to the tax slab in which the investor falls at the time of retirement. 

For NPS(National Pension Scheme)

The maturity proceeds are exempt from taxes. The funds come under the EEE category in terms of taxation i.e the contributions, gains & maturity proceeds are exempt from taxes.


Here are the taxation rules for debt and equity mutual funds:

Debt Oriented 

  1. The STCG(Short Term Capital Gains) are included in the income and taxed as per the applicable income tax slab to the investor.
  2. LTCGs on debt-oriented hybrid funds are taxed at the rate of 20% after indexation benefits.

For debt, LTCG is applicable when you hold the securities for more than 3 years and STCG is applicable when it is held for less than 3 years.

On Equity Oriented

  1. LTCG of more than Rs. 1,00,000 are taxed at 10% (without indexation).
  2. STCG is taxed at 15%.

For equity, LTCG is applicable when you hold the securities for more than 1 year and STCG is applicable when it is held for less than 1 year.


1. What are pension funds? 

A pension fund can be termed as any scheme, plan, or fund that aims to provide retirement income to the investor.

2. What are pension plans?

Pension plans are part of pension funds or you can say a kind of fund to which a specific amount from your income is invested during the tenure of your work. The investment made here further assists in withdrawing payments during the retirement period. 

3. What are some key features of pension funds?

Some key features of pension funds include vesting age, surrender value, and regular monthly income. 

4. What are some key merits of investing in pension funds?

Some of the key merits of investing in pension funds are as follows: long term planning, assisting in case of contingency, and providing options while investing.

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