Can amount be withdrawn from a pension plan before its maturity date?

My father had invested in a pension plan, which will mature in January 2016. Is it true that he can withdraw a third of the amount without being taxed? Should we go for the annuity on the remaining two-thirds amount or close it now, as both will be taxed. - Devika Basu, Bengaluru

Normally, a pension plan is taken to provide a steady source of income at the time of maturity of the plan or in retirement. Yes, at the time of maturity of a pension plan, the annuitant can commute a third of the pension, which is exempt from tax. The balance can be converted to an annuity amount, and is taxable under the head "income from salary" at the applicable marginal rate of tax.

This works well for many annuitants as in the post-retirement years, their gross income stands reduced and hence, the tax impact on the annuity is not significant. There are various combinations of annuities available that can be considered—annuity for a specific number of years, life annuity (pays annuity for your life), life annuity with return of premium, joint-life last survivor (annuity continues after death of the holder and in the name of the spouse), and joint-life last survivor with return of purchase price (in the case of death of holder as well as spouse, the premium is paid back to nominee).

Now, if you surrender the policy before maturity, the surrender amount is taxable. Moreover, the surrender will come at a cost, which would eat into the value of the pension plan you have. Having saved for it all these years, it will be a good idea to continue it till maturity and opt for an annuity based on the need your father has now.

OLMdesk@outlookindia.com