Pension Plan India: Basics & Comparison of various Pension Plans of India
This article is all about the basics of Pension Plans, how they work and how to make a perfect decision while chosing them. After reading this article, you will understand everything about the various Pension Plans available in India.
Introduction: Pension Plan -
Pension Plans are mainly offered by various Life Insurance Companies of India such as ICICI, SBI, LIC, HDFC & TATA-AIG. Pension Plans help individuals to plan their retirement effectively and peacefully. In layman’s language, The Pension Plan will provide the steady life long income to the individual after the retirement.
Before going for Pension Plan, it is advisable that an Individual understand the basics of Pension Plans, how they work, their advantages & disadvantages. Because if your Financial Knowledge is very sound than you may not require any Pension Plan. We will discuss the pros and cons of Pension Plan later on in this article.
What is Pension Plan?
Pension Plan is also known as Retirement Plan. So I will use both of these terms in this article but the meaning of both the terms is same. pension plans (also referred to as retirement plans) are offered by insurance companies to help individuals build a retirement corpus. On maturity this corpus is invested for generating a regular income stream, which is referred to as pension or annuity.
Here you have to understand that Pension Plans, Life Insurance Plans & ULIPs are entirely different things and you should not mix them with one another. Still most of the people of India don’t know that all of these are entirely different things.
- Pension (Retirement) Plans Versus Life Insurance Plans: There are some fundamental differences between life insurance plans and pension plans, with the objective behind both of them, being the most important. Life insurance plans aim at covering the risk from an unfortunate event. Pension plans on the other hand work on the opposite scenario that if an individual survives beyond an age (retirement age), he will need to provide for himself.
- ULIPs Versus Pension (Retirement) Plans: ULIPs means Unit Linked Insurance Plans.Conventional pension plans invest a major portion of the premium money in bonds and government securities (G-Secs). That is why the returns are on the lower side. And if one were to factor into the equation an annual inflation figure of approximately 5%-6% per annum, then the real return figures look even more unimpressive.
This is where unit linked insurance plans (ULIPs) can play an important role in the retirement planning exercise. ULIPs have a mandate to also invest a portion of the premium in the stock market apart from bonds and G-Secs.
This is the basic difference between pension plans and ULIPs. Pension Plans are only allowed to invest in Government Securities for safety of principal of an Individual while ULIPs are allowed to invest in equities also. And it is proven that, in the long run, Equity is the Best Asset class for Capital Gains.
Should I buy a Regular Pension Plan or ULIPs? -
Life Insurance Companies are aggressively marketing ULIPs on the basis of the fact that they will give you higher return than the regular pension plans as well as provide the life Insurance Cover. So ULIPs are 2 in 1 pack. Means ULIPs will provide you Insurance Plan Benefits as well as Pension Plan Benefits.
And this is the reason, why ULIPs are aggressively sold. Because they offer the dual benefit.
Than Why Finance Gurus don’t prefer or advise to Invest in ULIPs? -
Well, because ULIPs are associated with high administrative charges. According to Finance Gurus, ULIPs are nothing but the “Opaque Mutual Funds.”
The main problem with ULIPs is that, they charge higher administrative charges. Sometimes as high as 12-18%. Say for Example, if you chose to Invest Rs.1,00,000 in ULIPs than ULIP will charge up to Rs. 20,000 as a Insurance Premium charge, administrative charges, commission charges…etc…. And rest Rs.80,000 will go towards Investment for Long term. So in the long run, significant amount of your Investment will go towards paying the high administrative charges.
So according to Financial Planners, ULIPs are profitable only if you are on Selling side. Read my previous article,
Now at the same time, Any (Equity, Debt or Balanced) Mutual Funds will charge you 0% entry load if you buy them directly from fund houses. And Maximum 2.5% if you buy it from an agent. So if you chose to Invest Rs.1,00,000 in Mutual Funds for long term than all of that Rs.1 Lakh will go towards buying Units of that Mutual Fund. So if transparent and low-cost Mutual funds are available in the Market than why to go for Opaque Mutual Funds (ULIPs)?
Insurance Plans Versus Pension Plans: -
- Maturity Payout: In case of Insurance Plans, full maturity amount will be received by the Individual while in case of Pension Plans, Only up to one-third of the maturity amt can be withdrawn. Remaining 2/3rd amt has to be compulsorily invested in an annuity.
- Death Benefits: In case of Insurance Plans, Full maturity amount received by the nominees/ beneficiaries while in case of Pension Plans, Nominees/ beneficiaries have the option of receiving either the entire maturity amt or investing up to 2/3rd of the amt in an annuity.
- Tax Benefits: In case of Insurance Plans, Deduction up to Rs 100,000 available under Section 80C while In case of Pension Plans, Deduction up to Rs 10,000 available under Section 80CCC.
- Taxation of Maturity payouts: In case of Insurance Plans, Entire maturity amt treated as tax free in the hands of the receiver while in case of Pension Plans, Up to 1/3rd of the maturity amt, if withdrawn, is treated as tax-free. Pension received on the remaining 2/3rd amt is taxed as per the individual's tax slab.
Conclusion -
01) ULIPs are the worst Financial Products, so You should never think of Investing in them. Instead you should buy a conventional Life Insurance Plan & an Equity Mutual Fund separately. Never Mix Insurance with Investments.
02) You Must have at least one Life Insurance Plan.
03) You can go for Pension Plans but you have to understand the fact that, if you invest systemically in 2-3 equity diversified mutual funds instead for long term, than the returns will be much more after 30 years than conventional pension plans. On your retirement or just 2-3 years before your retirement, you can redeem all of your mutual fund units and invest it into Government of India Bonds and enjoy peaceful retirement.
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