Retirement Funding through pension plans

If one goes for a traditional pension plan the corpus grows at a measly 5–6 per cent, ensuring that the corpus buildup is glacial. Unit-linked pension plans (Ulips) can potentially give better returns, but the investment risk in the underlying investment is with the investor. 

Commutation of pension is possible between 25 per cent and 33 per cent, without tax. In case of the National Pension System (NPS) from the Government of India, the amount that can be withdrawn is 60 per cent, pre-tax, at the time of vesting (when the annuity or regular income will start). The balance amount will have to be deployed so that it may offer a regular income in the form of annuities. Annuities are taxable as income, making them a poor choice.  

Traditional plans can offer 5-7 per cent returns. But in all cases, annuities are taxable. Also, annuities remain the same throughout life, making them less meaningful as time goes by.

Hence, if your predominant vehicle for retirement funding is through annuities, you can never hope to hold your head high (unlike the Sar uthake jiyo pitch of pension plans). Annuities are at best a secondary option – not the primary option.

When do pension plans make sense? Pension plans may be fine in certain situations. 

For those whose incomes are modest and may not come in the higher tax slabs, pension plans may still make sense. This may also be suited to people with a modest risk appetite.

Also, if the person concerned is not very financially savvy, a pension plan may be a good fit, as it gives a steady annuity income for as long as that person lives.

There is nothing much one needs to do in a pension plan, once it has commenced. This makes it a good fit for those who want a simple product that does not need any interventions like renewing or reinvesting in another instrument.

However, the person receiving an annuity will need to produce a life certificate every year to prove that they are alive and hence can continue receiving the amount. This is the only thing the person receiving an annuity needs to do.

This infobite is taken from the book – If God was your Financial Planner, written by our founder & managing director, Mr. Suresh Sadagopan. You can also read his book to know much more about financial planning, personal finance and our approach itself. It is written in an easy-to-read storybook format.