Pension plans require a regular premium payment during your earning years. But unlike public provident fund (PPF), which is set up by the government, unit-linked insurance plans (Ulips) or mutual funds, pension plans, which are individual retirement accounts, pay you back a regular sum of money every month, after a certain number of years.
“We have advised many of our clients to invest in pension plans,” says Sapna Narang, a Gurgaon-based financial planner. “Mutual funds may be a better investment option for a shorter term, but over the long-term, pension plans can give you a better return.”
Archana Bhingarde, a Bangalore-based financial planner, agrees. “Pension plans are good for those who can’t save for the long haul,” she says.
The AXA Life Outlook Index survey shows that Indians start planning their retirement very late in the day, at around 49, compared with 30 for Asians living in Hong Kong, Singapore and the Philippines. The AXA survey also infers that a majority of affluent Asians are not willing to sacrifice their current living standards to retire early.
Robust premium collection from pension plans underscores the fact that Indians are becoming serious about retirement planning. “Currently, one-third of our total premium comes from pension plans,” says Pranav Mishra, vice-president of products, ICICI Prudential Life Insurance Co. Ltd.
Pension plans: A primer
There are two kinds of pension plans—endowment plans and unit-linked pension plans (ULPPs). While endowment plans invest in government securities and give you a guaranteed return along with a bonus every year, ULPPs invest in the stock markets and yield returns, which are market related.
You can also buy a pension plan with or without insurance cover. Plans with an insurance cover tend to give lower returns because part of the premium goes into buying the cover. In addition, a high mortality rate also dents the return of plans with an insurance cover. So if you are already adequately insured, it is advisable to buy a policy without an insurance cover.
In addition, you have the choice to either opt for a deferred plan or an immediate annuity pension plan. In a deferred plan, you get regular income, but only after a certain number of years of regular investment, depending on the elected term of the policy. With an immediate annuity plan, you start receiving regular payouts as soon as you make a lump sum payment. An immediate annuity plan is usually taken out by those who have retired already or are on the verge of retirement.
So how do you pick a policy that’s right for you? While taking out a policy, you need to compare the cost structure of the policy.
You need to be aware of the premium allocation, policy administration and fund management charges of the plan.
“Pension plans tend to be cheaper than mutual funds over the long term because while fund management charges could be as high as 2.25% with mutual funds, they range from 1.5% to 1.25% in the case of pension plans,” says Mishra.
“Pension plans are good for those who have crossed their 30s and do not want high equity exposure,” says Anurag Shangari, wealth manager with Mumbai-based Edelweiss Securities Pvt. Ltd. “Because of higher equity exposure, returns are much higher in mutual funds.”
Transparency is another issue with the endowment policies of pension plans.
“Transparency is higher in mutual funds, which declare their portfolio every month,” says Bhingarde.
Under Section 80c of the Income-tax (I-T) Act, you can get a tax deduction of up to Rs1.1 lakh on the annual premium contributed towards your elected pension plan.
At the withdrawal stage, while one-third of the total amount you get as lump sum is tax free, you need to pay tax on the remaining two-thirds that you would get annually as an annuity under the plan.
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