What is Pension Meaning?

What is Pension? Pension Meaning and Its Definition

Pensions are crucial financial tools for securing retirement. They offer options like annuities to build a stable post-employment financial portfolio.

Written by : Knowledge Centre Team

2026-01-04

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12 minutes read

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A pension is a fixed retirement fund for an employee paid as a regular income at regular intervals during their post-retirement years. A pension is a fund where a sum of money is added by the employer, employee, or both.

Retirement is your second inning, during which you want to fulfil your long-awaited dreams and spend time with your loved ones. However, you can only do it if you prepare. Your pension defines the quality of your retirement. To secure your post-retirement life, you need to start thinking about the pension.

Once you retire, a pension is your major source of income, and your savings at the time of retirement will ultimately define it. Also, since life is uncertain, you must have an adequate corpus and a recurring income.

Key Takeaways 

  • Start investing early to maximise the benefits of compounding and wealth accumulation

  • Diversify your investments to reduce risk and ensure stable retirement income

  • Choose a pension plan that offers inflation-adjusted returns for future security

  • Utilise tax benefits under Section 80C and 10(10D) to save on taxes

  • Opt for a plan that guarantees a lifetime income for financial stability post-retirement

What is a Pension?

The easiest pension definition is the regular monthly income you generate out of your saved corpus, usually after retirement. You usually build the corpus during your active employment. Your employer may also contribute to your retirement corpus.

Upon retirement, you can invest a part of your retirement corpus into a pension or annuity plan. The plan allows you to safely invest your precious retirement corpus for the long term even for a lifetime. The plan will then start offering you a regular monthly or quarterly income. You can also choose to have a growing pension to compensate for inflation.

How Does a Pension Plan Work?

A pension helps you generate regular income after your retirement. The working of pension is different and varies from plan to plan. However, the underlying work is the same.

You invest an amount in a pension plan regularly over the years, and it grows to create a sizable fund for you. Upon retirement, you can use the created corpus to buy an annuity, and based on the plan you have selected, you start receiving the pension.

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Types of Pension Plan

A pension scheme or plan helps you focus on yourself post retirement. With a regular income, you do not have to worry about money and can focus on things you love doing. There are different types of pension plans you can invest in to receive a pension after you retire.

  1. Annuity Plans: These are pension plans that provide you with a regular income stream. You buy an annuity plan and pay a premium amount or make a one-time lump sum payment to the insurance company. The insurance company, in return, pays your regular income. Depending on the type, an annuity can start immediately or on a future date.
  2. Social Security Schemes: The Government of India offers a variety of social security schemes, including pension schemes that help you invest today to secure your future. One example is the Atal Pension Yojana. You invest a certain amount in the scheme, and you receive a guaranteed pension after 60 years of age.
  3. Deferred Annuity: A Deferred Annuity is a type of pension plan where the pension starts a few years after the investment. For example, you can invest ₹10 lakhs now, and the monthly income will start five years later.
  4. Immediate Annuity: An immediate annuity is a pension plan where your monthly, quarterly or yearly annuity starts with the investment. For example, you invest ₹10 lakhs and start to receive a monthly pension after 30 days of investment.
  5. Annuity Certain: An Annuity Certain is a type of annuity plan which provides regular income for a limited period. For example, investing a lump sum money to receive a fixed income for ten years. At the end of the term, you will receive the remaining balance.
  6. Pension Plan with Life Cover: These are pension plans where primary account holders or joint holders will also have life coverage. If they die during the plan’s term, the policy will pay the death benefit amounts to their nominees.
  7. Life Annuity: A life annuity can be a deferred or immediate annuity that will continue to pay income until the policyholder's demise. Upon the death of the policyholder, the balance funds are paid to the nominee.
  8. Guaranteed Period Annuity: A guaranteed period annuity is an annuity that will continue even if the policyholder dies within the guaranteed period. Usually, other annuities require the policyholder to submit proof of living every year to continue receiving an annuity. A guaranteed period of annuity releases you from the obligation for at least a few years.

Common Mistakes to Avoid While Selecting the Pension Plan

Successful retirement planning requires a good amount of research, knowledge, and a well-structured time frame. However, most people tend to make mistakes.
Here are a few mistakes that you can avoid:

  • Not Starting as Early as Possible: It is important to start a pension plan as early as possible. Most people in their 20s spend money on unnecessary things, which leads to financial constraints in the future. However, if you follow a disciplined approach, you will accumulate wealth over time. Don't underestimate the power of compounding, as it multiplies your worth and allows you to get better returns in the future.
  • Not Diversifying the Portfolio: Investing in a single investment option is always a mistake that people make. If the market dips, it drags your value down. A diversified portfolio helps in reducing risk and maximising returns.
    For example, a combination of an annuity plan, and a guaranteed return insurance can help build a retirement fund that provides monthly income and also aids wealth creation.
  • Overlooking Tax Benefits: Many pension plans offer tax advantages that can help you save money. Under Section 80C of the Income Tax Act, you can claim deductions of up to ₹1.5 lakh on your premiums. Additionally, under Section 10(10D), the maturity proceeds from certain pension plans may be tax-free. By not considering these benefits, you could end up paying more in taxes than necessary.
  • Ignoring Inflation: Many people overlook the impact of inflation on their future expenses. What seems like a sufficient income today may not be enough 20 or 30 years down the line. It’s crucial to select a pension plan that offers returns exceeding the inflation rate to help preserve your purchasing power over time.
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Did You Know?

In India, NPS allows individuals to choose between equity, corporate bonds, and government securities for investment, offering flexibility and potential growth.

 

Source: ET Money

Retirement plan

How to Build a Corpus for your Retirement with a Pension Plan?

To build a corpus for your pension, you can invest in one or more options available to you. You can select the ones that are in line with your financial needs:

1. National Pension Scheme (NPS):

You can open an NPS account and invest in it while you are working. Your investment is divided into equity and debt and grows over time. On maturity (60 years), you can withdraw up to 60% of the accumulated corpus in a lump sum. You need to buy an annuity plan with the remaining corpus which helps you generate regular income.

  • Life-stage portfolio allocation
  • Exposure to alternative assets
  • Choose from aggressive to safe portfolios
  • Benefit from market-linked returns 

Learn more about the National Pension Scheme.

2. Public Provident Fund (PPF):

This provides you with secured returns over the long term and gives you a great investment option for building a corpus for pension. You have to remain invested in these schemes for 15 years.

  • Tax-free growth and maturity value
  • Partial withdrawals are allowed from the sixth financial year of investment
  • Extension in batches of five years after maturity

3. United Linked Insurance Plan (ULIP):

If you are looking to grow your retirement corpus aggressively, you can opt for ULIP as it lets you invest in stocks, bonds, and other financial instruments. You also get life insurance, and the premium you pay is eligible for a tax deduction. Here are some of the features of ULIP:

  • Hold up to 99 years of age
  • Partial tax-free withdrawals are possible after five-year lock-in
  • Invest in aggressive and safe portfolios
  • Manage your allocation automatically 
  • Bonus additions for long-term investors
  • Safety of life cover for family members

4. Employee Provident Fund:

EPF (Employees’ Provident Fund) is a retirement savings scheme for salaried employees in India. Both the employee and employer contribute 12% of the employee’s basic salary every month. Over time, this amount grows with interest. You can withdraw it after retirement or in case of emergencies. It helps secure your future with regular savings.

5. Pension Funds for Risk Diversification:

Pension funds help you spread your money across different investments like stocks, bonds, and fixed deposits. This reduces the risk of losing all your money if one investment performs poorly. By diversifying, you get steady returns and financial security for retirement.

How to Choose the Best Retirement Pension Plan?

The right time to start planning for retirement is as soon as you start earning. You can choose the best retirement plan based on the following parameters:

  1. Time to Retirement: The first and most important thing to consider is your retirement age. Some people want to retire at 60, while others want to retire earlier. Knowing the years before your retirement helps you choose the right pension plan.
  2. Inflation: The money you are investing today should be sufficient to help you live the life of your choice post-retirement. Inflation reduces your purchasing power and lowers the value of money. Your pension plan should grow at a rate higher than inflation.
    Why should you consider inflation while planning for retirement?

  3. Asset Allocation: Different individuals have different risk profiles. Your pension plan should allow you to choose your asset allocation. If you are starting early and your retirement has time, you can be a bit aggressive. As you come close to your retirement years, your pension plan should allow you to move your assets to safer options.
  4. Added Benefits: You can plan for retirement, but there can be some unexpected events in life. Your retirement plan should cover you and your family from unexpected life events through added benefits like life cover and protection against illnesses.
  5. Same Plan to Draw Pension: Once you have created a retirement corpus, you have to start a pension. Your pension plan should have the feature to convert your corpus to a pension. If not, you will have a tough time deciding how and where to invest the accumulated corpus for the pension.
  6. Taxability: Last on the list, but every essential parameter to consider is taxability. The premium (investment) you make towards your pension plan should be eligible for a tax deduction.

At some point, you will have to retire. If you don't want to worry about your financial needs post-retirement, you need to invest in pension plans. The sooner you start planning for retirement, the easier it gets. Pension gives you financial security and the freedom to live your life the way you want to.

Wrapping Up

Securing a comfortable and fulfilling retirement requires careful planning and investment in the right pension schemes. While understanding the pension meaning and options ranging from annuity plans and social security schemes to NPS, PPF, and ULIPs, there are numerous ways to build a substantial retirement corpus. Key considerations such as retirement age, inflation, asset allocation, added benefits, ease of converting corpus to pension, and taxability should guide your choice and give the answer to the question, what is pension?

Starting early and selecting a plan that aligns with your financial goals and risk appetite can ensure a steady, reliable income post-retirement, enabling you to enjoy your golden years without financial worries.

Glossary

  • Corpus: The total amount of money saved or invested, typically refers to the fund accumulated for retirement
  • National Pension Scheme (NPS): A government-sponsored pension scheme in India that allows individuals to invest in equity and debt to build a retirement corpus
  • Public Provident Fund (PPF): A long-term savings scheme in India that provides tax-free returns and is used to build a retirement corpus
  • Asset Allocation: It is the process of spreading investments across equities, bonds, and cash based on risk and time horizon.
  • Unit Linked Insurance Plan: It is a life insurance plan that combines protection with market-linked investments like equity or debt funds.
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Uncertain About Insurance

FAQs related to Pension

A pension is a retirement fund that provides a regular income after you retire. It is typically funded by contributions from your employer, yourself, or both during your working years. The money is invested and grows over time, and upon retirement, it is used to provide you with a steady income, ensuring financial security in your post-retirement years.

There are several types of pensions:

  • Annuity Plans: Provide regular income from a premium or lump sum payment
  • Social Security Schemes: Offer government-guaranteed pensions like the Atal Pension Yojana
  • Deferred Annuity plans: Start payments several years after the initial investment
  • Immediate Annuity plans: Begin payments shortly after investment
  • Annuity Certain: Offers fixed income for a specific period
  • Pension Plans with Life Cover: Include death benefits for nominees
  • Life Annuity plans: Continue payments until the policyholder's death
  • Guaranteed Period Annuity:  Ensures payments for a set period even if the policyholder dies

 

No, a pension is not a salary. A pension is a retirement fund that provides regular income after you retire, based on the contributions made by you and/or your employer during your working years. In contrast, a salary is the regular payment you receive from your employer while you are actively employed.

Yes, having a pension plan in addition to a Provident Fund (PF) can be beneficial. While PF provides a lump sum amount at retirement, a pension plan ensures a steady income stream throughout your retirement years. Combining both can enhance your financial security, helping you cover ongoing expenses and maintain your desired lifestyle post-retirement.

A pension plan and a term plan serve different financial purposes:

  • Pension Plan: Provides a regular income during retirement, accumulated through contributions over your working years
  • Term Plan: This plan offers a lump sum to beneficiaries if you die within the policy term, providing financial security to your family

In essence, a pension plan provides income during retirement, while a term plan provides financial protection to loved ones in case of your death. Both are important components of financial planning, addressing different aspects of financial security across different life stages.

As per Indian income tax rules, a pension is treated as salary under Section 17(1) of the Income Tax Act. The pension, meaning in income tax, refers to periodic payments received by an individual after retirement in return for past service.

Apart from regular monthly payments, a pension may also include a commuted portion received as a lump sum, family pension paid to dependents, and any arrears due. Together, these components ensure continued financial support after active employment ends.

When you receive payments after retirement from your savings plan, it is often called an annuity, which is a contract with an insurer for regular income, or simply your pension payout, which can come as monthly payments (annuity) or sometimes as a large lump sum.

The primary purpose of a pension scheme is to provide a steady source of income after retirement. It helps individuals maintain financial independence and stability when their regular earning capacity is reduced.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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