Retirement, Pension or Annuity plans are marketed as retirement plans or pension plans that provide regular income after retirement.
Obviously to get money under these plans, you first have to contribute or make the investment. This is the contribution stage which can be over several years or even one lump sum. Many plans offer you options of how this can be invested (government securities, debt, equity, alternative assets).
Then starts the annuity or pension stage, where you get periodic payments under the plan. These periodic payments can be monthly, annually or even increasing. They can be for a fixed period or for your lifetime. In the event you pass away, your nominee will get the benefits – as one time or periodic payments depending upon the plan.
Some retirement pension plans also provide life insurance where your nominee gets a separate amount (lump sum or periodic payments), should you pass away.
Any amount paid to you as pension is obviously from your contributions/investments, which earn money in the meantime. If the plan includes life insurance, the premium is deducted from your investment, and the balance is invested under the plan.
Let’s look at the features of these plans and see if they offer a real advantage.
Tax deduction on invested amount
The amount invested in retirement pension plans is available for a deduction up to Rs 1,50,000 under section 80C along with other investments (ie PF, PPF, life insurance premiums) etc. If you are investing in NPS (National Pension System/Scheme), there is an additional deduction of Rs 50,000 (see here for why we don’t like NPS either). Now if you’re already contributing to those other things then you don’t get the deduction. In fact we think that you should separately contribute to PF/PPF and get a separate term life insurance policy (see below) and better use the deduction for those investments.
If you have selected the new tax regime (ie without deductions) or are planning to shift to it at any stage, then anyway the deduction does not apply.
Tax on pension received
The pension paid under these plans is taxable. So no benefit here.
Returns
All investments are a play between Returns, Safety and Liquidity (ability to quickly convert to cash). If something is high, then something else is low. Retirement pension plans mostly guarantee you payments (safety) regularly (liquidity), so the return is low. Such returns may not be sufficient to beat inflation. You can get similar or better returns with mutual funds.
Flexibility
Retirement pension plans are not flexible and not liquid (other than the regular payment to you), in the sense that you cannot withdraw your entire investment. Certainly not without some charges. We believe it is better to have access to your entire investment after the age of 60, should you need it for an emergency. A mix of PPF and mutual funds can meet this requirement
Regular Income
Retirement pension plans offer you regular income for or during retirement. If you are looking for a regular receipt after retirement, you can go for an SWP – Systematic Withdrawal Plan of your invested mutual funds (we always suggest going for the “Growth” option when investing in a mutual fund and not the dividend distribution – now called the IDCW option, because of the power of compounding). So it is possible to get regular receipts through other means.
Life Insurance
Some plans offer life insurance. However, this is most likely to be insufficient. You are better off buying a separate plain vanilla term insurance policy for a suitable amount that you actually require. Further, the premiums are likely to be cheaper too.
Ease of understanding
We like simplicity. Retirement pension plans are complicated and messy and difficult to understand for most buyers. Even if you manage to understand (or think you do), there are so many options that you may never feel comfortable or satisfied with your selected option.
So the bottom line is…
Rather than a retirement pension plan, we suggest a mix of PPF, mutual funds and a term life insurance policy. This will offer you matching risk, better returns, more flexibility, higher liquidity and protection.
In order to know how much of each investment suits you, you can build your personalised investment plan with Propel Money here.
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