The Pension Fund Regulatory and Development Authority (PFRDA) will allow a minimum of 40 per cent of the retirement kitty to be mandatorily annuitised once the Pension Bill is passed and pension funds become a reality.

According to PFRDA executive director Meena Chaturvedi, “At the end of the accumulation phase of an investor’s fund, we would ask the investor to buy an annuity from life insurers using at least 40 per cent of his accumulated corpus. The rest would be given to him in lump sum.”

This would lend more flexibility into an investor’s retirement planning as the current option of buying a pension policy from insurers is relatively restrictive. Life insurers currently offer a deferred mode of pension. An investor has to first buy a pension policy from the insurer, pay the premiums over the term.

At the expiry of the term, the insurer does not hand out the entire corpus but only offers a third of the corpus, which is tax-free.

The remaining two-thirds goes into buying an annuity, the income from which is taxed.

Essentially, buying a pension policy right now means locking of one’s retirement kitty to buy an annuity at a rate in the future over which nobody has any control. “You don’t know what the rates will look like 10-15 years from now, it might tumble further or go up,” said Amar Pandit, who is a financial planner based in Mumbai.

“But if you get locked into a pension plan you are taking the risk. If the rates fall in future you will be tied to a lower rate which might not even fight inflation.”

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