Here's Why a Pension Plan Might Not Fulfil Your Retirement Goals

Nov 14, 2022

Listen to Here's Why a Pension Plan Might Not Fulfil Your Retirement Goals

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Having worked hard for years certainly makes you entitled to a happy and fulfilled retirement when you can finally hang your work boots and follow your passion or enjoy the golden years of your life with your loved ones. However, to have a happy post-retirement life and be financially independent even in your second inning, it is crucial to do retirement planning well in advance.

While your income may reduce or completely stop after retirement, your expenses remain the same. With increasing age and inflation, medical and day-to-day expenses continue increasing each year. Nowadays, people have become more aware of the need to build a retirement corpus and hence consider buying readymade retirement plans offered by banks and insurance companies. Retirement or pension plans are India's most sought-after insurance plans as they give a sense of financial safety. While these plans have several benefits, there are many cons as well.

Contrary to popular belief, a pension plan might not help you accomplish your retirement goals. Since you, the investor, solely depend upon your retirement fund to meet all your post-retirement financial requirements, you cannot bear running out of money in the sunset years. This article elucidates why a pension plan might not fulfil your retirement goals and what other investment options you can consider to accomplish your retirement goals.

Before going any further first, let us understand what a pension plan is;

What is a Pension Plan?

Pension plans, also known as retirement plans, are insurance-cum-investment retirement plans offered by life insurance companies. It offers the dual benefit of investment and insurance coverage. It ensures you accumulate a substantial amount over the years, and you receive a steady flow of income after retirement. A typical pension plan has two phases - an accumulation phase, where the retirement corpus is accumulated. And a distribution phase, where you start receiving a regular pension. Planning for retirement is a crucial aspect, so start planning your retirement early and choose the retirement plan smartly.

Here are some of the features and benefits of the Pension Plans:

  • The biggest advantage of investing in a pension plan is that you receive considerable returns on your accumulated amount along with a life insurance cover. Hence, it ensures you a financially independent life after retirement.

  • Pension plans offer fixed and steady income, ensuring financial freedom even after retirement.

  • Depending on the plan type, you can opt for an immediate income option that offers returns on your investment immediately after investing in the plan.

  • You get a tax exemption up to Rs 1,50,000 under Section 80C of the Income Tax Act, 1961.

  • Pension plans are long-term investment plans that generally do not allow any withdrawals until the accumulation period is completed and unless you have invested in an immediate annuity plan.

  • The vesting age (This is the age when you start receiving regular income from the Pension Plan) is flexible with most insurers. So, you can choose the age from which you want to receive the payouts. However, there is a minimum vesting age criteria of 45 years to 50 years, depending on the insurer.

  • Based on your requirements, you can choose to receive the pension in a lump sum or on a monthly, half-yearly, or yearly basis.

Here’s Why a Pension Plan Might Not Fulfil Your Retirement Goals
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How does a Pension Plan work?

The premise of a pension plan is very simple. Similar to a regular life insurance plan, you buy the pension plan by paying a regular premium. The insurance company invests your premium (after deducting certain charges) into safe fixed-income products. After you retire, your invested corpus is invested in an annuity scheme, from which you draw certain income on a regular basis. You can choose to receive your annuity payment on a monthly, quarterly, half-yearly, or yearly basis, as per your requirements.

What are the benefits of investing in a Pension Plan?

1. Death Benefit:

The Most important benefit of a retirement plan is the insurance coverage that it offers. It offers a death benefit, so in case of an unfortunate demise of the policyholder before the maturity of the policy, the beneficiary/beneficiaries receive a lump sum or annuity payout, depending on the options offered by the insurance company and chosen by the policyholder at the time of purchasing the policy.

2. Structured Plan:

A pension plan comes in a structured format. So you do not have to keep track of it or worry about periodically reviewing and rebalancing the portfolio. You can simply pay the pension plan premiums and forget about it until you retire.

3. Fixed Income:

The retirement plans invest the collected corpus into debt and fixed-income financial instruments. Hence, this low-risk investment avenue potentially provides you with a steady income in the winter of life.

What are the disadvantages of a Pension Plan?

1. Inadequate Returns:

While the retirement plans offer guaranteed fixed returns, these returns are not adequate considering the inflation. For example, if a pension plan offers you 6% returns on your investment, it will not suffice to meet your post-retirement requirements even if we consider the lower 6% inflation rate.

2. Inadequate Insurance Cover:

The sum insured offered under any investment-cum-insurance plan, including pension plans, is insufficient to replace your family's lost income. Instead, a term plan can offer adequate coverage for a considerably lower premium.

3. Inadequate Tax Benefits:

While the pension plan offers a tax deduction, it is limited to Rs 1,50,000. Besides, the annuity received post-retirement is taxable in the hands of the receiver.

Is a pension plan a good investment for your retirement?

A pension plan is a traditional investment instrument that individuals commonly invest in for their retirement needs. The primary reason for investing in a retirement plan is getting a steady income even after you hang your work boots and having an insurance cover that can financially protect your family, even in your absence. However, a pension plan may not fulfil these requirements as it neither generates inflation-beating returns nor offers sufficient life insurance coverage.

If you are wondering why the returns on retirement plans are so low, it is because these plans invest the underlying corpus, i.e., premiums collected from the policyholders, into almost zero-risk financial instruments, such as bonds and government securities. The returns on these safe-considered instruments are much lower and range between 7% to 8% per annum. However, considering the current and future expected rate of inflation, the average return offered on guaranteed pension plans which is 6%, does not add any value to the investment. Moreover, these returns are calculated on your premium after deducting certain charges, which further reduces the overall returns.

What other investment options you can consider alternatively?

Although pension plans provide guaranteed regular income, they might not be adequate considering the inflation rate. It is advisable to make your retirement planning with a mix of carefully selected debt and equity mutual funds and gold ETF. It can generate inflation-beating returns while reducing the risk with a diversified portfolio. Moreover, it is crucial to estimate your future financial requirements, decide the pension amount you will require and choose the right investment amount by considering your present earnings, expenses, and inflation. Bear in mind that mutual funds carry market risks. Hence, before investing, make sure you do the research thoroughly and choose the mutual fund schemes wisely, which will help you make an informed decision.

To conclude:

Remember that planning for your retirement is crucial, but it is equally important to invest in the right places to make the most of your hard-earned money. A pension plan is not necessarily the right place to invest to accomplish your retirement goals; you can do better with a mix of equity and debt mutual funds with some exposure to gold ETF over the long term. If you already have a pension plan, it may or may not make financial sense to continue with it. Hence, it is advisable to speak to your financial planner, who can guide you further after considering how many premiums you have paid and the current value of your investment.


Warm Regards,
Ketki Jadhav
Content Writer

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