Every time i discuss retirement planning concept with someone, gets a prompt question, “Which pension plan do you suggest?” These insurance companies are so in to the minds of people that for every goal they feel that a particular plan is available. Moreover the companies promote these products in such a way that people started feeling that these are the only products which will help them reach the goal. So, I tried to answer 2 questions through this article-
- Is retirement planning only buying a “Pension Plan”?
- Is “Pension plan” the only solution to secure retirement?
What is Retirement Planning?
Retirement planning is a part of Financial Planning, where finances are arranged in such a way so that you may live a comfortable and same or better lifestyle after retirement as you are living today. Do note here that retirement planning focuses on lifestyle which is not limited to the basic expenses but the habits, attitudes, tastes, moral standards, economic level, etc., that together constitute the mode of living of an individual or group. Financial Planner takes note on the details of your current income and expenses, understands the breakup as to the Basic expenses, medical expenses, Spending on vacations, spending on recreation, entertainment and hobbies etc. and then write down a plan after doing the requisite calculation as to how one can continue with the same lifestyle even after retirement and what to be done today to achieve the same. (Also Read retirement Planning Case Study)
What is a Pension Plan?
Pension plan is a product by insurance/Mutual fund companies with inbuilt features of accumulation and distribution. As the word pension is related with the retirement so it always excites an investor that after retirement he’ll be entitled to a secure lifelong pension. Here pension means annuity i.e. a fixed amount every year/month. Pension plan comes in 3 variants – ULIPs, Endowment and pension plans by Mutual funds (Templeton and UTI). To attract more and more investors these products comes up with various features on distribution of pension like pension to self or spouse or who so ever be the survivor , pension with return of purchase price after few years etc.
Now after understanding these 2 concepts/products let’s come to our questions.
Is retirement planning only buying a Pension Plan?
Certainly not. If we don’t know where to go, how can we reach there? If we don’t know the route we need to have a guide map along with us which will help us with directions. Retirement Planning helps us in the designing of that route map. In the whole journey you may face some obstacles like a health problem, job loss, accidents, uncalled emergencies, other responsibilities which may again suck out your money which you are saving for retirement. A retirement plan will take into account all the risks and help you manage such circumstances confidently with or without modifying your plan. For all this your Retirement plan needs to be reviewed and monitored carefully, so it should not be derailed from its path.
On the other side pension plan is just a product which is only there for some investments. One cannot be sure on the comfortable retirement just with the buying of a pension plan. On the other side you may buy a pension plan as a part of your investment portfolio if it suits your requirement.
Let’s answer the second question now
Is “Pension plan” the only solution to secure retirement?
Not at all. The structure of pension plan is very good where you keep on investing some amount every year or month , and at the vesting age you may ask your insurance company to start with a lifetime pension or as per the feature of pension distribution selected by you. The pension amount depends on the corpus accumulated.
But where the structure is good it has some inherent limitations which makes pension plan a less attractive proposition. Some of these are:
1. Pension is Taxable. Whatever pension you receive from a pension plan is always taxable and added back in the investor’s income. So if you have some other taxable income coming at that time the taxation will reduce your total inflow.
2. If due to some financial issues you want to come out of this product in between the tenure, then the complete withdrawn amount will be added back in your income and taxed as per income tax slab you fall in.
3. Pension distribution rate is very low. These days it is in the range of 6% – 7%. Just imagine if you get this much rate on your investments these days when a bank FD is offering you 9.25% for next 10 years, how would you feel? Please note that both of these are taxable.
4. Allocation charges, distribution and administrative costs associated with Insurance pension plans also hit very badly on returns and thus corpus.
You need to have a proper retirement plan at place which will guide you in your journey. Your target corpus must be clear, logical, and reasonable and should be calculated taking into consideration your current lifestyle and risk associated. Understand that in every pension plan the years before retirement/vesting age is for investment and accumulation which you can do through Public provident fund (PPF) (Read : All about PPF) , Equity diversified mutual funds or any other product as per your risk appetite or target goal (Retirement corpus) amount . These products are much easy to manage and also more tax efficient. After generating a requisite corpus you may take the benefit of Annuity by purchasing other products like POMIS, Bank Fixed deposit, Senior citizen schemes, Mutual fund MIP, Immediate annuity etc. as per your monthly income requirement, tax profile and other factors. The more you keep your Investments flexible the more it will be easy to manage. Do keep reviewing your insurance portfolio (Read :Reviewing your insurance portfolio) on the back side.
Proper retirement plan helps you retire rich, but pension plan is not the only or sure shot solution to it.