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  • What is a pension plan and why should I buy?

    Pension plans offered by insurance companies help individuals build a retirement corpus. It typically let you allocate a portion of your savings to accumulate over a period of time and gives you a source of income when you retire.

    The money invested is allocated across various funds for generating a regular cash flow of income during retirement period, which is referred to as pension or annuity. Pension plans are distinct from life insurance plans, which cover risk in case of an unfortunate event and secure future.

    Pension plan or Retirement plan are crucial investment plans that takes care of your financial needs post retirement.

    No matter what your current earnings are, it is advisable to invest in a pension plan, because medical emergencies or financial crises can happen any moment post-retirement. The amount invested in a pension plan grows manifold through compounding effect and creates a corpus to take care of your financial needs after retirement.

    An Illustration
    Let’s take the case of Mr Saxena, aged 30 years, who wants to avail a pension plan with a sum assured of Rs. 5,00,000 for a tenure of 30 years. The premium he would be paying for the same is approximately Rs. 13,500. In case of his unfortunate demise, his beneficiary will stand to get the sum assured of Rs. 5,00,000 plus the bonuses or additions, if any.

    In case Mr. Saxena survives the tenure, he will stand to benefit to the tune of the maturity amount. He could also opt to receive the pension either monthly, quarterly, or half-yearly as is available with most life insurance companies.

    Traditional Plans vs Unit Linked Pension Plans (ULPPs)
    The traditional non Unit-Linked Pension Plans are typically the ones that invest a major portion of the premium monies in bonds and government securities. They are more oriented towards debt funds, as these provide a certain guaranteed sum assured to the policyholders at the end of the policy tenure. Since a major part of their investment—about 60%—is in government securities, it may not be possible for a traditional plan to give returns that would beat inflation.

    ULPPs are more dynamic in nature and have several appealing factors to be considered as an apt retirement planning tool. These market-linked plans give policyholders the flexibility to choose fund types and the investment limit they want for equity investment. An option to switch between the investments (debt and equity) three to four times a year is provided to the investors. ULPPs are best for long-term perspective. As retirement planning is a long-term exercise, individuals would do well to park their money in these plans.

    According to IRDA mandates, both traditional policies and ULPPs have to provide minimum guaranteed returns, as they are aimed at building retirement corpuses. Traditional pension plans guarantee a minimum sum assured, along with bonuses if any, while unit-linked plans provide an average of 6-7% return.

    Pension plans can also be broadly classified and compared as below:
    • Plans with life cover and without life cover
    • Immediate Annuity Plans and Deferred Annuity Plans

    Investing in any pension plan is basically building a corpus slowly and steadily to secure your retirement years. So the early you start, the better. Based on one’s need, lifestyle and risk appetite plans can be availed.

    Best features that an ideal pension plan must have

    It is important to make hay when the sun shines. Insurance companies have come up various pension plans to help you have a happy and secured retirement life without any financial worries. Pension plans provide you a corpus fund and a regular income to help you live a comfortable life post retirement.

    There are certain features that you must look into an ideal pension plan before choosing one.

    A death cover with your pension plan
    You have bought a pension plan to take care of your retirement. But you never know when death can rob you of enjoying your retirement life and put financial burden on your family members or beneficiaries. Hence, you must ensure your pension plan has a death cover that will give your family financial compensation on your untimely death. Usually, death cover comes by default with a retirement plan. But you must check that it is provided for in your retirement plan. Usually, insurance companies provide death benefit which is higher of the fund value of the policy or 105 % of the premium paid till then.

    Option to choose annuity option you prefer
    Once you have withdrawn one-third of your accumulated fund, you can choose an annuity plan for the balance two-third corpus fund. You should check the pension plan about the various annuity options available for you. Ideally, you should be able to choose the option that you think best suits you. You can choose immediate annuity option or life annuity option among others. You can even choose to receive pension as long as you and your spouse are alive. Some insurance companies offer as much as six different annuity options to choose from.

    Minimum guarantee
    You should check out the minimum guaranteed amount offered by the pension plan. Minimum Guarantee amount or guaranteed maturity benefit is nothing but sum assured plus all accrued bonuses that is payable to the policyholder on vesting. Most insurance companies offer a minimum of 1 percent of total premium over the complete policy term.

    Now, the guaranteed maturity benefit amount is available to the buyers at the time of buying the policy.

    Flexibility in investments
    You would like to enjoy a higher income in your retirement life. Then, you should check out that your pension plan has a feature that allows you to decide the asset allocation of your fund. You can choose to be a bit risky if you are young and can afford to take more risks. For example, you can start with 100 percent equity and move on to debt gradually to get higher returns on your fund. In such plans, you can switch your fund profile depending on the circumstances. So, you have the option to be flexible and invest in the assets which you think is profitable and dependable.

    Usually, pension plans serve the purpose of securing your retirement life. But you must make sure that it should suit your requirements and must have features that will meet your needs.

    Advantages of a Pension Plan

    If you are in a job, retirement is an inevitable phase of your life. If you are a businessman, after a certain age, you will not be able to invest time and energy in your business. So, you have to think of certain ways to keep your family expenses going. You can’t change your lifestyle or social status after retirement neither it is expected. This is where you need a pension plan.

    This is another marvel of life insurance where you can receive regular income even after your retirement. The aim of a pension plan is to secure your and your family’s post retirement life. You can take care of all your basic needs and maintain your status intact even after retirement if you have a good pension plan.

    Types of Pension Plans

    There are many pension plans available in the market to choose from. Study the different kinds of pension plans available so that you can choose the best one as per your future requirements and present financial ability.

    There are two ways you can invest in pension plans: Traditional pension plans or ULIP based pension plans.

    ULIPs are market-linked plans, which means the maturity amount on your investment will not remain fixed while in traditional pension plans your periodical returns are guaranteed. However, in ULIP you also have the scope to gain more income than expected if the market return is higher than expected.

    An example will make this clear.

    Suppose your current age is 40 years and you invested in a pension plan where you have to pay Rs.50000 annually for 10 years. You want your pension to start after 20 years—when you reach the age of 60 years—and continue till you reach 80 years. In this scenario, in a traditional pension policy, you can get almost Rs. 1 Lakhs every year depending on the policy you choose. However, in the case of ULIP, this is not guaranteed.

    Benefits of a Pension Plan
    Apart from securing your future, a pension plan has several other benefits:

    • Guaranteed life time income: On the maturity of a pension plan, say after 10 years or 20 years, you get steady monthly income for a certain number of years after retirement. No other insurance can provide such a benefit. You have the option of choosing the pension receiving term. Some policy holders prefer to receive it until death while others prefer to receive for a certain period.
    • The best way to meet health care needs: Old age brings with it a lot of health issues but getting a health care policy after 60 is very tough and sometimes expensive too. Medical bills substantially increase during this period of life. A planned pension policy can meet your health expenses without stressing you out.
    • Flexible premium options: The maximum premium option can be as high as 50 Lakhs per annum, so you have plenty of premium paying options. You can even make a one-time payment as a lump sum. Pension plans are the best insurance option to invest your hard-earned income for the future as per your plan.
    • Death benefit: The death benefit of pension plans is also advantageous for your family. Though the aim of a pension plan is to create a fund for post-retirement expenses, after the death of the policy holder, the nominee or beneficiary gets the sum invested with other predetermined benefits. Suppose, your pension benefit or annuity continues from 60 to 80 years, after your death, the nominee will get the entire sum invested, which will be a lump sum.
    • Tax benefits: Like any traditional insurance policy, you will get tax benefits on all the premiums under section 80CCC of IT Act.

    Pension plans provides the necessary financial freedom that most people need after retirement or when they are no more in a condition to work or earn. For maximum benefit, you should start early. Investors who can start the policy before 30-35 years of age stand to gain more. Let the fund accumulate when you are young and able to earn, and enjoy the benefits of a pension plan when you actually need a steady source of income.

    Top 10 Online Pension Plans in India

    Pension planning is one of the core essentials of a good financial plan. With multiple life insurance pension plans available in the market today, choosing the right pension plan can sometimes be a difficult proposition.

    Here are 10 most popular pension plans that can be useful for individuals with different financial needs and plans.

    1: Reliance Nippon Life Smart Pension Plan
    Reliance Nippon Life Smart Pension Plan is a unit linked, non-participating, pension plan allowing policyholders to build a corpus for your golden years. You can choose a policy term from 10 to 30 years, as per your convenience as well as enhance the retirement corpus through loyalty additions. The plan also offers a choice of choosing the vesting age from 45 to 75 years and extension of retirement age as per your needs. The plan comes with tax-free withdrawal of 1/3rd of the accumulated corpus upon retirement.


    2: HDFC Life Personal Pension Plus
    HDFC Life Personal Pension Plus is a popular pension plan offering assured benefit equal to 101% of all regular premiums paid on death or at vesting. The plan offers flexibility to choose the premium payment frequency and comes with an EMI facility for HDFC Bank Credit Card holders. The plan can be taken only on a single life basis with a policy term of 10 to 40 years.


    3: SBI Life Saral Pension Plan
    SBI Life Saral Pension is a individual, participating, non linked and traditional pension plan offering corpus to meet your retirement needs. The plan offers retirement corpus through regular simple reversionary bonuses throughout the policy term. The plan offers the flexibility to extend the accumulation period or defer the vesting date up to 70 years. The plan also pays out a simple reversionary bonus throughout the policy term.


    4: Bajaj Allianz Retire Rich
    Bajaj Allianz Retire Rich plan offers assured vesting benefit and guaranteed death benefit making it a popular pension plan. With the option to select regular, limited or single premium payment and flexibility to pay top-up premium, the plan offers additional loyalty additions added to the final fund value on the original vesting date.


    5: Reliance Nippon Life Immediate Annuity Plan
    Reliance Nippon Life Immediate Annuity Plan is a well known immediate annuity plan offering a regular income for entire life. With only a one time premium payment you get to choose from 3 various categories of annuity payout. Life annuity, Life annuity with return of purchase price and life annuity guaranteed for 5, 10 or 15 years and payable for life henceforth are the three options available.


    6: HDFC Life Guaranteed Pension Plan
    HDFC Life Guaranteed Pension Plan is a non participating deferred pension plan offering guaranteed benefit on death or at vesting. The plan offers guaranteed additions added to it each year along with the lump sum vesting addition payable. The plan is tailor made for individuals seeking guaranteed returns on invested corpus at retirement to ensure a substantial post retirement corpus.


    7: BSLI Empower Pension Plan
    BSLI Empower Pension Plan is a non-participating unit linked pension plan. The plan helps accumulate your premiums and the investment returns thereof into a corpus for your retirement. On vesting date, the plan offers the policyholder the greater of the guaranteed vesting benefit or the fund value. As a death benefit, the plan pay to the nominee the greater of the guaranteed death benefit or fund value as on date of intimation of death.


    8: LIC Jeevan Nidhi
    LIC Jeevan Nidhi is a conventional pension plan that offers dual advantages of pension along with saving features. The plan offers death cover during the deferment period and annuity on survival till the date of vesting making a popular pension plan. The policy provides for guaranteed additions to the tune of Rs.50 per thousand of the basic Sum Assured for each completed year for the first five years.


    9: LIC Jeevan Akshay-VI
    LIC Jeevan Akshay-VI is an Immediate Annuity plan available by paying a lump sum amount as per the eligible age bracket for the policyholders. Annuity is payable for 5, 10, and 15 or 20 years certain and thereafter as long as the annuitant is alive. The Annuity payable for life increases at a simple rate of 3% p.a. The policyholder can opt for annuity payment either at monthly, quarterly, half yearly or yearly intervals.


    10: Aegon Life Insta Pension Plan
    Aegon life insta pension plan is a popular pension plan that is tailor made to pay a continuous income post retirement for the rest of the life. The plan offers life annuity along with joint annuity payouts with the spouse with payments of annuity made either annually or monthly as per preference of the policyholder. As a non-linked, non-participating single premium immediate annuity plan, loan cannot be availed on the policy.


    Top 10 online Pension Plans in India at a glance
    Pension Plan Min-Max Entry Age Vesting Age Policy Term Minimum Premium Sum Assured Premium Paying term Premium Paying Frequency
    Reliance Nippon Life Smart Pension Plan 18-65 years 45-75 years Single premium: 10 years Regular premium: 15 years- 30 years Regular pay annual mode: Rs. 36,000 for 15-19 years term Regular pay annual mode: Rs. 20,000 for term above 20 years Limited Pay annual mode: Rs. 48,000 for 15-19 years term Limited pay annual mode: Rs. 24,000 for term above 20 years -- 10-30 years Annual, Half-yearly, Quarterly, Monthly and Single
    HDFC Life Personal Pension Plus 18-65 years 55-75 years 10-40 years Annual: Rs. 24,000 Half-Yearly: Rs. 12,000 Quarterly: Rs. 6000 Monthly: Rs. 2000 The minimum sum assured on vesting: Rs. 2, 04,841 Equal to policy term Annual, Half-yearly, Quarterly, Monthly
    SBI Life Saral Pension Plan 18-65 years 40-70 years For single premium: 5-40 years For regular premium: 10-40 years Rs. 7,500 per annum Rs. 1,00,000 Equal to policy term Single, Annual, Half-yearly, Quarterly, Monthly
    Bajaj Allianz Retire Rich 30-73 years 37-80 years 30 years Deferment periods available: 7 years to 30 years (both inclusive) only Single Premium 7 to 10 years: Rs. 1,00,000 11 years and above: Rs. 50,000 Regular Premium Less than 7 years: Rs. 50,000 p.a 7 to 10 years: Rs. 25,000 p.a 11 years & above: Rs. 15,000 p.a -- Up to the Policy Term chosen Regular/ Limited Premium Payment option
    Reliance Nippon Life Immediate Annuity Plan 20-80 years NA NA NA As per underwriting NA Monthly, Quarterly, Half-yearly and Annually
    HDFC Life Guaranteed Pension Plan 35-65 years 55-75 years 10-20 years Annual: Rs. 24,000 Half-Yearly: Rs. 12,000 Quarterly: Rs. 6000 Monthly: Rs. 2000 The minimum sum assured on vesting: Rs. 81,145 5, 7 and 10 years Annual, Half-yearly, Quarterly, Monthly
    BSLI Empower Pension Plan 25 – 70 years maximum vesting age of 80 years 5 – 30 years subject to maximum vesting age of 80 years Minimum Rs. 18,000 p.a. if paid annually Minimum Rs. 24,000 p.a. if paid semi-annually Minimum Rs. 30,000 p.a. if paid quarterly; or Minimum Rs. 36,000 p.a. if monthly -- Regular Pay Annual, Half-yearly, Quarterly, Monthly
    LIC Jeevan Nidhi 20-60 years 55-65 years 5-35 years NA Rs.1,00,000 under Regular Premium policies Rs.1, 50,000 under Single Premium policies -- Yearly, half-yearly, quarterly or monthly
    LIC Jeevan Akshay-VI 30-85 NA NA NA Rs. 500 per month NA  
    Aegon Life Insta Pension Plan 50-75 years NA NA Minimum - Rs. 1,00,000 Maximum - No limit NA Single Premium NA

    What are the different types of annuity options available in the market?
    If you have a large sum of money and clueless what to do with it, but wish to earn regular income from it, then you can try investing your money in annuity. This mode of investment is a contract between the insurance company and the annuitant whereby, in exchange of a large sum of the money, the former promises to pay the latter a regular income or annuity for a certain period of time, provide death benefits, asset growth, and even long-term care benefits.

    There are different types of annuity options available in the market that you can invest in. The types of annuity options available in the market depends on factors such as the scheme offered, annuity amount given, and when it is given. Let us have a look.

    Annuities offered based on the type of amount given
    Fixed Annuity: As the term suggests, the amount of annuity offered in this plan is fixed over the period of the plan or till death. The amount does not change throughout the duration of the plan. It provides protection against reducing rate of interest, as the annuity is fixed throughout. This annuity option is good for conservative people who prefer fixed income rather than investing in market-linked equities. However, the real value of this fixed annuity will keep reducing due to rising inflation.

    Variable Annuity: This plan is high risk, offering high returns as you can invest in variety of assets, ranging from conservative fixed deposits and government bonds to more aggressive investment such as in emerging markets, capital appreciation, among others. However, there is a minimum guaranteed annuity in such a plan.

    Annuities offered based on time
    Immediate annuity: This plan is reliable for those who are looking for quick returns and are nearing retirement age. This plan offers pension to the annuitant instantly, without waiting for any period.

    Deferred annuity: In this plan, you choose to receive pension after a period of time. For example, you invest Rs 50 Lakhs in an asset of your choice for the next four years. The fund keeps growing for the next four years. Suppose, it accrues to Rs 60 Lakhs after the fourth year. Then you are entitled to receive annuity on Rs 60 Lakhs after the fourth year.

    Annuities offered based on scheme
    Life annuity: This is a preferred annuity plan as it provides guaranteed pension till the death of the person.

    Life annuity with return of corpus: Besides getting a guaranteed annuity till the end of your life, your nominee will be entitled to receive the corpus or the initial investment made post your death in this plan.

    Annuity guaranteed for a fixed period: In such as plan, you can choose the period you wish to receive guaranteed pension. It can be 5, 10, 15 or 20 years. However, if you die within the period, your nominee is entitled to receive the pension for the remaining period. Another variation of this plan is that if you survive the term, you are entitled to receive the same pension till the end of your life.

    Hence, it is found that annuity is one of the best ways to earn guaranteed returns in your savings. But if you are looking to invest in aggressive assets, be prudent to take the help of a financial advisor.

    Useful Tips to buy Pension plan in India
    Pension plans come in various shapes and sizes and what fits one may not fit another. You have to look carefully at them to choose one that is tailor-made to meet your requirement, or the one flexible enough to let you customize. For this, understanding your requirement perfectly is the first step.

    Here are 10 tips to help you choose the best pension plan.

    1. Your pension plan must be able to build a sufficiently large corpus:
      First, decide the upper limit of your investment. If a monthly schedule suits you, determine how much you can afford to invest each month without affecting your present needs significantly. You can use the rule of thumb which says ‘divide your age by two and the digit you get is the percentage of your monthly income you should put aside for pension savings’. Once this is fixed, you should shop for the plan that promises the highest return on investment. For, insufficient retirement corpus would generate insufficient annuity, thus defeating the purpose of retirement planning.
    2. Check the annuity or monthly pension your plan promises after retirement:
      A good pension plan should generate a monthly income of at least 80% of your present monthly income after adjusting against inflation. For example, if you are earning Rs. 50000 monthly, you should have a monthly income equivalent to Rs. 40000 at current prices, assuming it is invested in an annuity plan that gives 8% return. Anything less may affect your living standard negatively.
    3. Don’t buy a plan that provides life cover if you are already insured:
      You should not buy a pension plan that bundles life insurance with retirement benefits. Remember life insurance comes at a cost. Such a plan entails heavy mortality charges, which results in lower returns because the same is deducted from your premium before allocation. This tip presumes you already have a life plan. Even if you don’t, you should buy life insurance separately so that your funds will have more chances to grow.
    4. Your plan must have a long locking period:
      A larger lock-in period means you cannot touch your retirement funds easily, which you should refrain from in any case. Temptation to dip in your retirement savings to meet contingencies is real and huge. How common it is to take loan against PPF or EPF to purchase a house. There are plans that allow partial withdrawals, while others like ULIPs have more liquidity—some even allow full withdrawals. But liquidity is an undesirable trait when one is looking to build a corpus. You do not want to have even the chance of withdrawing your retirement savings prematurely.
    5. Investment portfolio of your pension plan:
      Do not buy pension plans on promises alone—find out how they will walk the talk. It is your money and it is your business to know where it is invested. Are they investing more in equities or debt? A balanced investment portfolio has a diverse fund allocation, which ensures stability of returns. Depending upon how balanced or skewed you want your funds in favor of or against equities or debt, you can classify a pension plan. For early starters choosing an aggressive investment portfolio, one that has over 60% fund allocation to equities is not a bad idea.
    6. Hidden charges and other costs:
      Reading the fine print of your policy document is very important. If you see an asterisk symbol, T&C (terms and conditions), a dollar sign, or ampersand, do take the time to read the related clause under them. Take expert help if you must. Often times, hidden charges and other limiting conditions are communicated using these devices.
    7. Tax benefits:
      Find out what your pension plan says about taxes. A regular pension plan will have tax liability attached with premature withdrawals and also with annuities.
    8. Type of plan:
      Pension plans are classified into three categories: Conventional, Balanced, and Unit Linked in increasing order of market exposure, i.e. conventional plans are safest of the lot and also have the lowest return rates. Match your requirement and risk appetite to these types before making a choice.
    9. Effective rate of return:
      If your plan gives 8% returns and the rate of inflation is 6%, the effective return will be 8-6=2%. If your plan is unable to beat the inflation rate, its effective return is negative. Inflation consideration is a must before choosing a plan.
    10. Participating or non-participating plan:
      You should also check whether your plan is a participating or non-participating plan i.e. whether it declares the dividends and bonuses or not. You want transparency from your pension planner.

    What are the different types of Pension plans in India
    Pension plans, also known as retirement plans are a great way to ensure one builds a retirement corpus catering for a steady flow of income post active working years. Many people rely on just the savings which may not always be sufficient considering the rising inflation and growing medical needs in the later stages of life. Pension plans are devised to ensure they offer abundant returns to ensure the quality of life does not suffer with regular annuity payments in the sunset years.

    Understanding pension plans categorization
    There are various types of pension plans available in the market today, depending on various categorization parameters. One must pick the right kind of pension plan suitable for the personalized needs to attain the maximum benefits of a pension plan.

    Annuity based pension plan:
    Annuity based pension plans are categorized as per the premium to be paid and mode of annuity to be received.

    • Deferred annuity pension plans: In a deferred annuity plan the premium can be paid either as monthly, quarterly, half yearly or annually as per the underlying pension plan. The annuity or payout for the pension plan begins after a pre-specified time period as per the annuity contract.
    • Immediate annuity pension plans: In an immediate annuity pension plan, the lump sum premium is paid as a onetime premium and the annuity begins immediately and continues to be paid as per the policy term or till the insured's life as per the annuity contract.

    Pension plans with life cover and without life cover:
    Some pension plans come with a life cover component making them a protective cum pension plans while others offer no such life cover. Since a majority of the amount paid as premium is directed towards annuity or regular payouts, the life cover of a pension plan is usually small.

    Usually all deferred pension plans are with cover pension plans while immediate annuity payment plans are those offering no such life cover.

    Unit Linked Pension Plans (ULPP) and Traditional Pension Plans:
    Unit Linked Pension Plans, commonly known as ULIP pension plans, pool the funds of all premiums paid and invest the same in equity and debt instruments. Being a market linked plan, such plans offer a higher chance of returns.

    Traditional pension plans on the other hand invest the pool of money only in safe debt instruments allowing for a security first investment approach. The returns thus assimilated by traditional pension plans are steady and not as high as unit linked plans.

    Life Annuity and Fixed Term Annuity Pension Plans:
    Pension plans are also broadly classified as the part of annuity paid for the plan. In a life annuity pension plan, the annuity or payout is made for the entire life of the policyholder. On the other hand, a fixed term annuity plan offers annuity for a prefixed limited time as per the policy details and annuity contact of the plan.

    No matter which pension plan you may choose, pension plans come with taxation benefits. All the premiums paid for a pension plan offer tax deduction of up to Rs. 10,000 under Section 80CCC of the IT act. On maturity, the policyholder can withdraw 1/3rd of your accumulated pension funds without paying any tax while the remaining 2/3rd is paid out as annuity and is taxable as per the income bracket.

    How my premium is calculated while buying an Pension plan
    When it comes to pension plan or any kind of insurance plan, the first thing that a likely policyholder looks for is the premium that must be paid. Pension plans are slightly different, as the premium you pay is linked directly with the annuity paid out by the plan. So if you need a higher amount as annuity post retirement, you must match the premium payments accordingly.

    Here is a look at premium calculations for a pension plan and its associated factors.

    Types of pension plans and the premium quotient
    Unlike a traditional life insurance policy or a term insurance plan where you pay premiums for the entire tenure of the policy, pension plans come with slightly different premium payment options. Depending on the type of the policy, you can either choose to pay a lump sum one-time premium, or regular premium payments for immediate annuity plans or deferred annuity plans.

    Most of the immediate annuity plans seeking lump sum payment have a cap for the minimum premium you can pay for the policy. Usually, there is no maximum limit for the amount of premium paid as a one-time payment.

    Choosing the apt premium for your pension plan
    The premium you must pay for your pension plan is linked with the effective returns the policy will generate over a period of time. To calculate the apt premium for a pension plan, one must determine the financial corpus needed for your sunset years.

    The following four things will eventually determine the amount of premium you should pay for an effective pension plan:

    • How much money you will need at retirement depending on your current lifestyle and financial needs
    • The age at which you choose to seek a pension plan
    • Your income and your monthly savings and expenses
    • The type of pension policy and its associated returns

    Age and retirement age
    The sooner you choose to seek a pension plan, the longer it gives the policy to generate decent returns. By the time the annuity payment starts, the policy may have generated decent returns on the invested amount. On the other hand, the later you opt for a pension plan, the higher will be the amount of premium required to build a substantial final corpus.

    Annual income and growth rate
    The amount of money you earn and the possible growth rate as per your selected policy plan are also essential parameters. For example, if you are a low risk seeker and plan to invest in a “safety first” endowment pension plan, the returns on your investment may range between 4% to 8% at best. The premium amount should therefore be tweaked to reach your final goal of retirement financial corpus.

    Current saving investments
    Your current investments, the quantum of investments, the likely returns, and the tenure of each such investment also play a role in determining the amount of money you will need at retirement, which will eventually lead to the apt premium you must pay for a pension plan.

    Monthly expenses
    The overall monthly expenses currently being incurred should also be taken into account when determining the premium component of a pension plan. You do not want a situation where you are paying a higher premium and are not having enough funds for day-to-day financial goals in the accumulation phase of the plan.

    What are the factors affecting my Pension premium
    It may be confusing to insurance seekers that the same plan comes with different premium for different people. There are a number of factors for this difference.

    So what are the factors affecting the premium of your pension plan?

    A pension plan is a financial tool that is primarily aimed at providing a person with a steady income post retirement. It comes in various forms like ULIP with annual payments or as single premium plans. There are two components of a pension plan: one is the insurance part, and the other is the investment.

    The premium of a pension plan depends on what the risk premium being charged is, which depends on the sum assured one has opted for. Usually, a maximum of 10 times the premium paid could be taken as sum assured.

    If you have taken ULIP plan, the risk premium would be cut from the fund that is accumulating.

    If a pension plan with sum assured is taken, then below are the factors that affect the premium.

    Age: Age is the primary factor in calculating any risk cover. The younger you are, the lesser the premium to be paid, as a younger person is less likely to develop any life threating disease or die a natural death. The higher the age, the more the risk attached to one’s life, hence the premium increases.

    Gender: Life expectancy of women is more than that of men and hence women are charged a lower premium.

    Smoking and drinking: This is a must question in every application form. If you are a regular drinker or smoker, the risk attached to your life is considerably higher, and hence a higher premium is charged.

    Medical history and health: Your own health status and medical history of the family is a deciding factor in determining the premium charged. For instance, obesity is responsible for a host of other health problems, so if one is obese, then the premium is higher.

    Lifestyle: If one indulges in dangerous sport or likes skydiving, then this may affect the premium. Remember, in case of an unfortunate event, the claim may also be denied if prior disclosures at the time of application are not made.

    Your job: If you work on an oil rig or are in an industry that can affect your life expectancy, then the premium charged goes up.

    All these factors will affect your pension premium if and only if you opt for a life cover in the pension plan. But if you have taken a pension plan that has no risk cover, then all these factors will have no influence on your premium.

    A pension plan is meant for regular income after your retirement and comes with various options as to how one can take that pay-out. These options determine the amount you get but do not affect the premium that one pays.

    It is always advisable not to mix one benefit with other. If the protection of family income in case of an unfortunate event involving the earning member is the main concern, then term insurance should be the natural product choice, not pension plan.

    Are there any add ons/riders in Pension plan
    Every insurance plan is designed to cover a particular type of need of the insured. A pension plan aims to cover the need for a regular monthly income to the policyholder post retirement. For this, a fund is accumulated, and that is available at the end of the term of the policy.

    The other component of a pension plan is the risk coverage. One can take a sum assured that is payable in case of demise of the policyholder. This covers the need for providing the family with an income in the event of an unfortunate event happening to the policyholder.

    However, besides this, various other requirements can arise—one can fall ill due to critical illness and may require money for that. There could be an accident, which may lead to disability, and if it happens, one may not be able to pay their premiums. To cover all these situations, various riders can be added to the main policy.

    A rider is an add-on benefit that can be added to the base policy—with an additional premium—for a particular type of coverage to the policyholder.

    The various types of rides available in a pension plan are:

    Critical Illness Rider: This rider covers the eventuality of any critical illness happening to the policyholder. The common illness covered here are cancer, coronary artery bypass, heart attack, kidney or renal failure, major organ transplants, and paralytic strokes. This rider provides an additional cover besides the base cover in such cases.

    Accident Death Benefit Rider: This rider gives additional cover in the event of an accidental death of the policyholder. This is over and above the actual sum assured.

    Accident Death and Disability Rider: An accident may not always result in death, but may lead to disability. This rider provides additional coverage in such situations. The types of disabilities covered and whether permanent or partial disability is covered varies from company to company. Some companies only cover total disability and some pay a particular percentage of partial disability.

    Waiver of Premium: In case of the unfortunate disability of the policyholder, the premiums are waived off, and the policy continues sometimes. The insurer is still eligible to get pension post retirement or at maturity of the policy if this add-on is taken. Waiver of premium is in-built in a disability rider, and can be also taken as a separate rider.

    Income Benefit Rider on Disability: This rider provides a steady income, which is 1% of the sum assured as monthly payment in case of disability of the life assured.

    Taking a rider is optional, and it can provide various benefits like flexibility and tax benefits. Critical illness rider gets tax benefit under section 80D, and accident disability and income benefit rider are allowed tax benefits under section 80C base.

    Some points to be kept in mind regarding riders are:

    • The total premiums for riders cannot exceed 30% of the premium of the base policy
    • Rider sum assured cannot exceed the sum assured of the base policy
    • Rider term cannot be more than the term of the base policy
    • Riders come to an end with the maturity of the base policy

    Riders are an easy way to add much more flexibility and options to the base policy and cover various types of eventualities. But the same should be opted carefully as per the needs of the policy buyers.

    What is not included in Pension plan/exclusions
    A pension plan has two components: the insurance part, which works like any other form of insurance, and the investment part, which is an accumulated fund, providing one a pension at the end of the term or after 60 years. The pension part is a guaranteed return as per the plan you choose, but the insurer can deny or reject death benefit based on their terms and conditions.

    The conditions under which the insurer may refuse the claim are termed as ‘exclusions’ in insurance parlance. Since insurance cover (sum assured) is taken with the view that if the income of the family stops with the death, disability, or critical illness of the policy holder, then the insurance cover will compensate for the loss. But the insurer on the other hand will review the claim request and pass the claim only after proper review and inspection of the conditions that caused the death or disability.

    Exclusions of a pension plan with sum assured
    The exclusions of a pension plan with sum assured are the same as that of other insurance policies.

    Suicide: Suicide is strictly not covered in any insurance policy. Suicide is a voluntary act, which the policyholder has undertaken knowing fully, its effect on the family, and their income. Also, if insurers start giving death claims on suicide, insurance will be misused.

    Accidental death: Insurance plans come with a rider for accidental death, but in usual cases, the insurer may deny the claim on certain grounds like drunken driving.

    Other exclusions in pension plans with sum assured are:

    • When the death is due to excessive intake of drugs or alcohol, or any disability caused by this
    • If one indulges in some activity that may put their lives at risks like scuba diving or bungee jumping
    • If death occurs due to one’s profession, and if at the time of application the same was not disclosed
    • If the death is due to any act which is criminal
    • If the death is due to any complication in pregnancy or child birth
    • Death is due to any pre-existing illness.

    Exclusion in case of critical illness: The most important factor that is considered by the insurer in such situations is the time that has elapsed since the policy has been taken and the onset of a critical illness. If the same has happened within a year or two of policy commencement, and nothing has been disclosed at the time of application, then the insurer has every reason to doubt the claim and deny it. However, if a reasonable period has passed and then the illness occurs, the insurer would look at the claim with a different view.

    Exclusion for life style: At the time of application, the insurance company asks the applicant whether he or she is a smoker or drinker, and if they are, what the quantum of intake is. Based on that, the insurer underwrites the risk and charges a premium or may even refuse to cover the person. However, if the same has not been disclosed, then the insurer is well within its rights to deny the claim. So, it very important to be truthful at the time of application.

    These exclusions cover the insurance part of a pension plan. Regarding investment part, there may be certain conditions regarding the time the policyholder surrenders the policy, etc. But generally, after three years of inception, the insurer is bound to pay the full amount of fund value as surrender value at the time of surrender of a policy.

    What are the rates of returns in pension plans
    Senior citizens need regular and steady income as a replacement for salary in their golden years. This is the reason why they should look out for favourable avenues to park their funds and get an income from it for the rest of their lives. While many people fear they may not be left with enough money for emergency situations, many others worry about the low pension rates that don't even beat inflation at times. However, by introducing liquidity to these plans, private players are trying to attract seniors to invest in pension plans.

    With the benefits of post-retirement income, withdrawals, tax rebates and insurance protection – pension plans are there to support the retirees or shield their surviving spouse from any financial burden that may arise later.

    The annuity plans available gives the option of receiving pension monthly, quarterly, half-yearly or annually. The maximum and minimum amounts that can be invested are decided according to the duration of payments. An immediate annuity plan is however a single premium plan, where the premium collected is invested in the available bonds.

    Rate of Returns
    Because of its long term nature, insurers take a conservative approach towards these plans when they offer the rate of return. Private players on an average do not offer more than 6-7% return. There have been instances where most of the foreign insurers went bankrupt because of these annuity plans. Only LIC, which is backed by government, offers a handsome rate of 9.38%.

    Again, due to limited availability of long term debt instruments to match the pension plan pay-out liability, the asset liability mismatch exposes insurers to significant interest rate risk. With increasing longevity, reinvestment risk increases further thereby making it more challenging to price annuities.

    Let’s consider the rates of return offered by some of the leading private insurers currently.

    Name of the Policy Entry Age Annuity amount (in Rs p.a.) Rate of Return
    LIC's Varistha Pension Bima Yojana 60 and above 60000 9.38%
    Kotak's Lifetime Income Plan 45 - 99 years 48482 7.58%
    HDFC Life's New Immediate Annuity Plan 30 - 85 years 47898 7.49%
    ICICI Prudential's Immediate Annuity Plan 45 - 100 years 46934 7.34%
    SBI Life's Annuity Plus 40 - 80 years 46887 7.33%
    Birla Sunlife's Immediate Annuity Plan 30 - 90 years 45714 7.14%
    Max Life's Guaranteed Lifetime Income Plan 50 - 80 years 45655 7.14%
    Bajaj Allianz' s Pension Guarantee 37 - 80 years 42272 6.61%

    National Pension Scheme (NPS), with its safety, security and high rate of returns, is fast gaining popularity. While comparing other investment options available to the retirees, NPS is seen to fetch interest rates of up to 12% to 14%, depending on the scheme opted for. NPS maturity corpus is taxable, which means you have to pay income tax on the 60% that you withdraw from NPS. The annuities that you get are again considered income and hence taxable.

    Deferred Annuity
    In this particular policy, the annuitant pays premiums till the policy term is over. After its term, the policyholder starts receiving the pension. No tax is levied on the amount the annuitant invests. For this type of plan, one either can make a onetime payment or make regular contributions. In deferred annuity, insurance is used as an instrument to create a corpus. Hence, mortality and other charges eats into returns and is unable to beat inflation.

    Immediate Annuity
    The annuitant has to deposit a lump sum, rather than paying number of premiums over a period of time and the pension will begin immediately. This is generally availed by someone who is about to retire and would like to receive a monthly income right away. The annuitant can avail tax benefits as per I-T act. In case of immediate annuity, one knows the rate of return while purchasing the plan.

    how annuity amount can be calculated in a Pension plan
    The main objective of a pension plan is to provide the plan holder a pension at retirement. But how much amount will one get monthly or annually as pension is seldom explicitly mentioned in a plan. Instead, the sum assured or the retirement corpus is stressed upon.

    Generally, the calculation of annuity is left out because it depends upon how much the policy holder plan to withdraw from the corpus at retirement and how much to invest in an annuity plan. But the amount of annuity the annuitant—the plan holder who invests in an annuity—gets can be calculated using a few simple steps.

    Annuity and types of annuity
    When you receive an annual payment regularly for a fixed number of years, it is called annuity. On the contrary, if you pay a regular annual payment, as in a rent for example, it is called annuity due.

    Deferred or Immediate Annuity: Annuity can be deferred or immediate. A deferred annuity is one where you invest a monthly amount now for a fixed number of years with a view to receive annuity later. Immediate annuity, on the other hand, starts immediately after investment. The annuitant starts receiving annual payment immediately after purchasing the annuity plan.

    Fixed and Variable Annuity: Furthermore, annuities can be fixed or variable. A fixed annuity is one where the annuity provider pays a fixed amount every year as the rate of interest is fixed at the time of the purchase. Variable annuity refers to a floating rate of interest. If the annuity is invested in stocks or equities, the rate of interest will vary according to the performance of the stocks. The amount the annuitant gets is therefore variable.

    Calculation of annuity
    In most pension plans sold in India, annuity decisions are left to the policy holder after maturity, which usually coincides with retirement. The retiree is often required to invest a part or whole of the retirement corpus in an annuity plan upon receiving the maturity amount. This is a case of immediate annuity.

    Consider an example.

    Abdul gets Rs. 1 crore as the total benefits from his pension plan at time of his retirement. He makes a partial withdrawal of Rs. 20 Lakhs form this corpus and invests the balance i.e. Rs. 80 Lakhs in an immediate annuity plan. Assuming a life span of 80 years, Ali would need a monthly pension for the next 20 years.

    He can now choose an annuity plan that pays annuity till death, or a fixed number of years, e.g. 20. Also, he can plan his annuity to exhaust with a term agreed upon. Alternatively, he can choose to arrange for his annuity to be paid to his spouse or the beneficiary after his death.

    Let us assume he chooses a 20-year period annuity at a fixed rate of 8% to be exhausted with the term. His annuity can be calculated using the following formula:

    Annuity value = Payment Amount X Present Value of an Annuity (PVOA) factor Or, P = r(PV)/1-(1+r)^n
    Where, P = Payment amount; r = rate of interest; PV = Present value; and n = years

    Ali’s annuity value is therefore = Payment Amount X corresponding PVOA factor

    Now PVOA factor can be found from an ordinary PVOA table which has rows and columns for period and rate of interest respectively. Every entry corresponds to a unique combination of the number of row and column.

    In Ali’s case, the period and rate of interest corresponds to 20 years and 8%. In the table, therefore, we have to find the entry in the cell corresponding to the row for 20 years and column for 8%, which is 9.82 rounded off to two significant digits.


    Or, Anil’s annuity payment = 80/9.82 Lakhs = Rs. 8.15 Lakhs per annum

    His monthly pension therefore = 8.15 Lakhs/12 = Rs. 68,000 (correct to two significant digits).

    The same figure will be reached by substituting values in the second formula too.

    Can Pension plan gives a guaranteed returns
    Generally, pension plans are equipped with the capability of providing a minimum assured amount plus benefits accumulated. This is achieved by investing the funds in interest generating avenues, part of which can be withdrawn by the buyer at retirement and the rest invested in annuities to generate a regular stream of income on monthly or annual basis in form of a pension.

    However, to answer the question whether pension plans give guaranteed returns, it is pertinent to understand how funds are allocated in a particular pension plan. If most of the funds are invested in bonds and government securities (G-secs), the returns, though meager, will more or less be guaranteed.

    On the other end of the spectrum are those plans that allocate entire funds to equities. These plans are designed to take advantage of the market situations and generally are able to generate handsome returns. However, such plans may not offer a minimum sum assured as they are totally dependent on markets.

    Segregating Minimum Sum Assured and Returns
    It is to be noted that the ‘minimum sum assured’ is a function of the premium paid by the customer and is generally the sum total of the premiums plus interests. This is the guaranteed component of most pension plans.

    However, this is not to be confused with ‘returns’, which is the final amount at maturity available to the customer after appreciation of the retirement corpus built over and above the accumulation of premiums as a result of the performance of the funds invested in different income instruments. This may be an amount beyond the expectation of the buyer or much lesser but definitely greater than the minimum sum assured.

    Understanding the structure of a pension plan
    Pension plans can be broadly divided into two categories—Conventional or Regular Pension plans and Pension ULIPs or Unit Linked Pension Plans. Plans under both categories provide life cover as a bonus, except in a few Unit Linked Pension plans, which are designed to reap minimum advantage from market situations without bearing the burden of a life cover or guaranteeing an assured sum. These last are a kind of “no frills” investment plans with the sole objective of maximizing returns.

    Conventional Pension plans allocate the funds in bonds and G-secs and therefore carry the least risk. Since there is no exposure to equity, these plans more or less give guaranteed returns. However, as PFRDA (Pension Fund Regulatory and Development Authority) has mandated that a portion of pension plans must be invested in equities, there has been a restructuring of the fund allocations in most regular plans. Now, most conventional plans have diversified their investment portfolio, with around 20% funds allocation in equities.

    Unit Linked Pension Plans, on the other hand, have a well diversified investment portfolio, with up to 60% funds allocated to equities. The balance is invested in debts, bonds, and securities and other interest earning low-risk avenues. A few pension ULIPs go for an aggressive all-out fund allocation of close to 100% in equities as mentioned earlier.

    Understanding the dynamics of returns
    Now, to the moot point. Technically speaking, nobody can guarantee how funds will perform over a given period of time.

    One can, however, come reasonably close to predicting returns if two things are known—how funds are invested and historical performance of the sectors these funds are invested in. The evidence of the last 10 years’ performance says Conventional plans can give returns close to 8% on CAGR (Compounded Annual Growth Rate) basis.

    ULIP pension plans, on the other hand, have given returns in the range of 10-15% depending upon the exposure to equities.

    To give an example, for a person of 30 years’ age at entry, a conventional pension plan can give a return of around 10 Lakhs for a premium of around 14000 paid annually up to retirement while the minimum sum assured may be 5 Lakhs. A ULIP pension plan can, for the same amount and term, return up to 15 Lakhs at maturity.

    It is important to note here that these figures are for illustration and assume a 6% and 10% rate of return respectively, which is more realistic considering the premiums are invested after deducting various charges like fund allocation charges etc.

    This article aims to inform the reader and uses approximations. Returns are subject to market risk and can never be guaranteed technically and reader’s discretion is required before buying a plan. The figures and rates indicated have been reached after referring from various sources online and offline. For more information, readers are advised to compare pension plans online.

    Do I have to under go medicals while buying a Pension plans
    ‘No medical tests required’, you may find a clause in most insurance plans. But in many cases insurers are asking for medical tests based on certain conditions. So do you really need to undergo medical tests for buying insurance policies, especially when it is a

    Pension Plan?
    In general, insurance companies can ask you to undergo a medical test to judge your life risk. A pension plan with sum assured inevitably covers your life risk and critical diseases. So, the insurer may want to know whether you are fit enough to take the policy to reduce their chances of risk.

    If you are choosing a pension plan with no death benefit, it works like a normal investment plan, with no or little risk to the insurer, and therefore, they will not ask to undergo medical tests.

    The purpose of medical tests in Pension Plans
    In insurance, a medical examination may be needed if the company feels to assess your insurability. Such decision of the insurance company depends on different factors like the following ones:

    • Age: At higher ages, the life risk is higher in the eyes of the insurer. So, if somebody is taking a policy at the age of 30, it is at lower life risk, than an individual taking the same policy at the age of 40. In the latter case, the insurance company may ask the applicant to undertake a medical examination.
    • Sex: Men are more prone to certain diseases like heart and brain diseases while women are prone to bone related diseases, reproductive system disorders, etc. The insurance company may ask for a medical test on the basis of gender for buyers of 35+ years if they opt for a higher sum assured.
    • Lifestyle: Certain lifestyle brings more health hazards like smoking, drinking, and certain types of adventure hobbies. This may lead to a medical test.
    • Pre-existing diseases: If your application shows that you have certain pre-existing diseases or you have undergone treatment for any disease in the last three years, then you may have to go for the medical test.
    • High sum assured: If you have chosen a high sum assured and your income, age, lifestyle, and profession is perfect for that sum assured, the insurance company can ask for a medical examination.

    So, it is at the sole discretion of the insurance company whether they will ask you to submit the medical report as per their system or accept your insurance without it.

    Essential medical test reports are asked in life insurance
    All the basic health parameters are tested when you are asked to undergo a medical test while applying for a life insurance or pension plan with life coverage, as below:

    • Measurement of height and height
    • Blood pressure and pulse readings
    • Blood routine analysis test to check cholesterol, glucose, protein, and HIV
    • Urine analysis to check glucose, kidney function etc

    After undergoing the medical test, the insurance company will review the results to determine if you are eligible for the policy and to decide the premium to be charged. 

    These are different tests most of the time the insurer asks you to undertake. However, which tests are essential for you depends on your application and the variable factors discussed before.

    What is the right amout to invest in an Pension plan
    To enjoy the sunset of your life, you need financial security. After all the hard work you put in during your earning phase, you deserve an all-expenses-paid retirement!

    However, the auto-enrolment pension scheme of your company or organization may fall short in delivering enough to see you through your retirement years. You may need to invest in a pension plan over and above what is offered by your employer. And you need to invest well.

    But how much depends upon your specific situation. There is no set rule to determine how much you should put into your pension.

    A prevalent rule of thumb
    Halve your current age and put aside an equivalent percentage of your net pre-tax salary after deductions each month into your pension pot. For example, if you are 30 years of age, you should put 15% each month into a pension plan.

    To be on the safer side, you may need to be more elaborate in your calculation.

    Here are a few pointers to help you decide how much from your disposable income should go towards retirement planning.

    The more the merrier
    Simple arithmetic says the more you invest now, the more you reap later on. The power of compounding has a big impact on the returns especially if the time horizon of investment is a long one. Additionally, investing more in pension schemes can save you more taxes. You should be careful though not to sacrifice the basic needs of life by committing to unfeasibly larger premiums. In simple terms, invest only from the surplus disposable income.

    How early you start
    An early start will allow reaching your retirement goals easier. You can invest a larger amount towards your retirement planning if time is on your side.

    Your existing pension scheme
    Those who already have a 50-50 pension scheme offered by their employer—where the employer and employee contribute 50% each towards a pre-determined pension fund (e.g. EPF)—may require investing less in a child plan than those with no existing plan as such.

    Your salary or monthly income
    How much you “should” invest depends on how much you “can”, which, in turn, is decided by how much you earn. Generally, the upper limit of investment advised is 20% of your monthly income or salary. A greater percentage may affect your lifestyle and can even hit your basic needs.

    Your existing investments towards saving and insurance
    Your total investments at the age of entry i.e. at the age you decide to buy a pension plan, also influence your retirement planning. Do you already have a life cover? Have you invested in stocks or equities? If you have, you might afford to invest less in a pension plan. If not, you need to invest more.

    Debts and liabilities
    Ignoring existing debts and liabilities can leave your retirement planning in tatters. It is advisable to clear your loans and debts first. If your pension plan is giving you a return of 8% and you have a personal loan @ 14%, it would be a smart move to clear the latter before buying the former.

    Vesting Age
    The right amount to invest in pension plans also depends upon the vesting age you want i.e. the age at which you want the benefits and pensions to start. For someone starting at 30 years of age and looking forward to retire at 40, they will need to invest significantly more than someone who wants his pensions to start from 60.

    A scenario
    Imagine a 30-year-old salaried individual, Raman, who has a monthly pre-tax income of Rs. 60,000. Raman looks forward to retire early—preferably at 50—so that he can pursue a writing career. He has no debts to start with and is a bachelor at present. Having the advantage of starting early, he looks to build a big retirement corpus and is not particularly risk-averse.

    Now, even if Raman chooses a conventional pension plan promising average returns of 8%, a Rs.9000 monthly investment, which is 15% of his monthly income and conforms to the ‘rule of thumb’ mentioned earlier, can build a retirement corpus to the tune of 2 crores.

    However, as he can afford to take a few risks in the beginning, he can also opt for a pension ULIP, which puts his money in a ratio of 60:40 to equities and low-risk instruments respectively. In normal times, this can add considerably to the already calculated impressive corpus.

    A general practice is to invest more in equities in the beginning and keep switching funds to safer avenues gradually such that close to retirement funds are not exposed to market volatility.

    This above scenario is for illustration purposes only and ignores several facts including Raman’s insurance purchases, existing EPF and tax implications. You may want to consult a certified financial planner before making a decision.

    What is Unit Linked Pension plan
    If you are looking for a long term investment for your twilight years and expecting higher returns for it, take the ULPP (Unit Linked Pension Plan) route.

    Unit Linked Pension Plan is a product that allows the flexibility of investing your insurance amount in various funds depending on your risk appetite and achieves higher returns as compared to traditional endowment pension plans and NPS. The insurer manages fund investments on your behalf.

    ULIP came into being in the late 2000s and was aimed at providing a better option to the consumer, but there were several issues with the product and how it was being sold. Consequently, the IRDA has revised its norms in 2010. Earlier, ULIPs did not carry an insurance component and were purely an investment vehicle, but as per the new norms, they are now required to provide a mandatory death cover.

    After these changes, new product offerings in this product line from insurers have come down, but there are still many good options available.

    Here is a deep dive into Unit Linked Pension Plan.

    How ULPP works
    ULIP Pension Plans or Unit Linked Pension Plans allow insurance buyers to opt for a variety of options in the type of funds—like Equity, Balanced, or Debt— one wants to invest their money in. One can choose the fund depending on one’s risk appetite and can switch between various funds.

    ULPPs accumulate the invested money till retirement by allocating it in various funds of the policyholder’s choice. Upon retirement of the policyholder, they pay one-third of the corpus to the policyholder, and invest the remaining in an annuity scheme. The proceeds from the scheme will pay the retired a monthly, quarterly, half-yearly, or annual income.

    For those who aim to get higher returns, equity is the natural choice. The important point is ULPP is a long term investment vehicle and should be treated as such.

    The various charges are allocation charges, fund management charges, and risk premium charges, and they differ from plan to plan. Earlier, there was a huge discrepancy in the product as some companies used to charge 100 % of the premium as allocation charges, but now this has been corrected by the IRDA.

    How ULPP is different from traditional plans
    Traditional pension plans invest funds in government’s fixed income instruments such as bonds and G-Secs. However, the returns here are low. Unit-linked plans, on the other hand, invest in equity markets. Traditional plans are simpler and safer, whereas ULPPs entail risks associated with the markets, but offer higher returns.

    Taxation on ULPP
    Taxation for pension plan is same as other insurance products. The premium paid is eligible for tax benefits under Section 80C. On maturity, the one-third lump sum pay-out, if availed, will be tax-free and the annuity pension payments are taxed if it is crossing your income tax slab.

    Pension plans are a crucial cornerstone of retirement planning. If opting for ULPPs, the important point to keep in mind is that they are long-term products as equity tends to provide the best returns in the long term. They should not be confused with term insurance. If the need is to provide for insurance coverage, then pure insurance products must be bought.

    What are the types of guaranteed Pension policies
    Being habituated to a certain lifestyle, it is really hard to change that lifestyle after 60 and live a simple life, to which you are not at all accustomed. The best way to enjoy the life to the fullest and with a realization that the life after retirement is more jovial is to buy a pension policy from a reputed life insurance company.

    Pension policies are a real “friend in need” for practically all those who want to lead a respectful life. A guaranteed pension policy is a special type of policy. Let us look at these in detail.

    What is a pension policy?
    • It is just another type of life insurance policy where you pay certain premium for a certain period of time and then get benefits in form of monthly, quarterly, half-yearly, or yearly return for certain time period or for life. This is called annuity payment in insurance.
    • If any unfortunate incident takes place, your nominee or beneficiary will get the invested fund—known as corpus—back. Otherwise, he or she can choose to proceed with annuity under predetermined terms and conditions.

    Having the primary knowledge on pension policy, you can now turn to guaranteed pension policy.

    Here again, you need to know that there are two types of pension policies available: Guaranteed and non-guaranteed. The former is also called traditional pension policy while the latter called ULIP based pension scheme. The guaranteed pension policy enables the policyholders to get guaranteed annuity every month without fail till the end of the term, while the non-guaranteed version doesn’t offer any guaranteed annuity every month—it depends on the market return. Guaranteed or traditional pension policy is a secure way to get income at regular intervals of time.

    Types of guaranteed pension policy
    Option Annuity type What does it offer
    a. Lifelong annuity The policy holder gets the pension as long as he or she is alive.
    b. Lifelong annuity and the return of principal amount (Corpus) Guaranteed pension to the policyholder as long as he or she is alive; after his or her death, the corpus is returned to the nominee.
    c. Annuity for certain period of time Guaranteed pension is paid to the policyholder for a certain period of time, say 5, 10, 15, or 20 years. If the policy holder dies before the expiry of the term, the nominee gets the remaining annuity.
    d. Annuity for certain period of time and thereafter Guaranteed pension is paid just like the previous type, after that period, pension is still paid as long as the policy holder is alive but on different terms and conditions as agreed upon.
    e. Joint policy with lifelong 100% annuity to either of the spouse (Joint policy) The policy holder and his or her spouse are covered under this guaranteed pension scheme; after the death of the policy holder, his or her spouse gets pension.
    f. Joint policy with lifelong 100% annuity to either of the survivor till one survives and return of corpus Like the above policy, the guaranteed pension is paid to any of the survivors as long as one of the spouses is alive. After their death, the invested amount is returned to the nominee.
    g. Joint policy with lifelong annuity to one spouse and 50% to the survivor This is a guaranteed pension policy where one spouse gets 100% annuity lifelong and after his or death the surviving spouse gets 50% of the pension lifelong.

    So, choose the right policy as per your need and plan after retirement. It is feasible to start this kind policy in your 30s and develop a decent corpus, which will ensure a good monthly return

    as per your chosen term. Guaranteed pension policy ensures peaceful life and steady income when you really need financial security.

    Is buying Unit linked Pension plan always risky?
    A Unit-Linked Pension Plan (ULPP) for retirement might sound a bit confusing. You may think that as the market is volatile, how can one put his money for the retirement corpus in an instrument that invests in equities where there’s a high chance of losing money.

    But if the plan promises capital protection along with guaranteed maturity benefits, then the proposition becomes interesting.

    ULPPs were at the verge of extinction and considered a non-viable proposition. However, after some changed guidelines by IRDA, private insurance companies have re-launched the product and customers are responding positively to it.

    As per new regulations, ULPPs have to assure that the principle invested is secured, which means, investors never lose their money. Hence, the premiums paid throughout the policy term are safe and secure. The worst case scenario could be no profit, which in a long-term product is highly improbable. But then, you have the guaranteed maturity benefits too.

    Guaranteed amount from a ULPP
    Through ULPP, you get a guaranteed maturity benefit if you survive the term of the plan. And this is 101% of all the premiums that you have paid. So, you either get 101% of all the premiums you have paid or the fund value that has been invested in the stock market, whichever is higher. In the event of policy holder’s unfortunate demise before the plan matures, the nominee gets 105% of all the premiums that has been paid or the fund value, whichever is higher.

    Flexibility in ULPP
    ULPPs allow you a choice in equity investment. You have an option to invest anywhere between 25% to 100% in equity. The remaining would go into fixed income securities. Depending on your risk appetite, you can opt for as high as 75% in equity, especially when you are young and just starting a career. Or you can opt for as less as 25% in equity and the remaining in fixed income securities. If you are near your retirement age, say over 50 years, then you can take a more conservative approach.

    Tax benefits from ULPP
    You get a tax rebate under Section 80C and 80CCC of the Income Tax Act combined up to Rs. 1.5 Lakhs per year from your taxable salary, on the payment made towards the ULPP. One third of the amount you get as a lump sum on maturity in a ULPP is tax-free. You have to compulsorily take an immediate annuity from the same insurer with the remaining two-third. The pension you receive from the immediate annuity is added to the taxable salary and taxed as per the income tax slab you belong to.

    ULPP’s Modus Operandi
    ULPP basically invests your money paid in the form of premiums in stock markets after deducting certain charges and expenses. Your money grows or depreciates depending on the stock market performance over a period of time. A compulsory health or a life cover is provided in the unit linked pension plan.

    However, there’s a compulsory lock-in period of 5 years. After you hold the policy for 10 years, you start getting loyalty additions or bonuses. On surrendering the policy before lock-in period, one has to pay a maximum surrender charge of Rs 6000. However, you will get proceeds of the fund only after the lock-in period expires. Now, even if you surrender your policy, taking an annuity policy from the same insurer is compulsory.

    Since, debt can never give as high returns as equities in the long run, ULPP may be a good option for specific types of investors. With a guaranteed maturity benefit up to 195% (depending on insurer, premium payment option, policy term and fund option opted), it definitely cannot be ignored.

    Is there any partial withdrawl facility available in Pension plans
    A comprehensive pension plan is what you need incase you are planning for a secure retirement. A suitable pension plan helps you to secure your regular cash flows for meeting basic daily needs after retirement.

    Your golden years should be financially sound with a proper pension policy. However, emergencies do tend to occur, in which case a partial withdrawal facility from your policy can be a boon. Not all pension plan comes with the flexibility of partial withdrawal, so enquire about this facility before buying your policy.

    A unit-linked pension plan, which is considered to be one of the most effective long term insurance products, allows partial withdrawal facility, making it even more attractive.

    However, there are some terms and conditions associated with it.

    Terms and conditions for partial withdrawal from ULPPs
    • Withdrawal can only be done after the policy has been active for a minimum of 5 years. Some insurers have capped it at 3 years. Read the offer documents carefully to have an idea.
    • Only a percentage can be withdrawn and not the entire sum. If you do so, you will have to surrender the policy prematurely. In general, an amount equivalent to a year's premium has to be present in the policy at any given time. For example, if you have a total of Rs1 Lac in your account and your annual premium is Rs.25,000, you can withdraw a maximum of Rs.75,000.
    • Similarly, there’s a minimum withdrawal limit too. One can borrow a minimum amount of Rs.1000 from the pension policy fund, but this may differ from policy to policy.
    • The sum assured gradually decreases for every partial withdrawal made for a period of 2 years for age of policyholder less than 60 years.
    • When policyholder reaches 60 years of age, the assured sum decreases permanently by a proportionate amount vis-à-vis the partial withdrawals made so far.
    • Partial Withdrawal is only allowed if all your due premiums have been paid in a timely manner and the policy is active and in-force.

    Partial withdrawal option in a pension plan is a useful feature but you need to be sure as to how it works. Experts often advise against withdrawing as it reduces the sum assured. Try to avoid using this feature unless you are in desperate need of funds. Also, it makes sense to partially withdraw from a unit-linked policy only if it is for a long duration like 20 or 30 years. For, in such long term policies, the funds are substantial and partial withdrawals don't drastically impact the sum assured.

    An Illustration to explain how it works
    Venkat’s Unit-Linked Pension Plan has an annual premium of Rs.25,000 and sum assured of Rs 2.5 Lakhs. At the end of 5 years, his fund value is Rs 1.5 Lakhs. He is in dire need of funds and went for a partial withdrawal, but was allowed to withdraw a maximum amount of 20% of his fund value and nothing beyond that, so that at least 1 years’ premium remains in the fund. Hence, Venkat could only withdraw Rs.30,000 (ie 20% of Rs 1.5 Lakhs) subject to the fact that at least Rs.25,000 remains in the fund.

    And all this left his sum assured reduce by Rs.30,000 for a period of 2 years after which it would be restored since Venkat is below 60 years of age. (Note, that his plan was not a double benefit plan that offers Fund value + Sum Assured. Double benefit plans offer sum assured in case if the policyholder expires.) If he was a sexagenarian, the sum assured would have decreased permanently and not be restored at all.

    What if market falls at the time of maturity? Will my returns/corpus go for a toss?
    When the wind blows and the bough breaks, the cradle will fall. Comparing the fate of your retirement corpus with the scary proposition of this popular nursery rhyme may not be palatable. Nevertheless, your returns can have a great fall like Humpty Dumpty when the market tumbles at the time of maturity provided the chunk of your returns are still in the market at that time. And God forbid, if that is the case, it will take a great deal to put Humpty Dumpty together again! However, the chances of that happening are next to none. But since an inch is as good as a mile where markets and misses are concerned, one should better beware.

    Let us look at a scenario when the market plummets (which is common) and the larger part of retirement funds nearing maturity are still invested (which is rare).

    A Scenario
    Ramesh is an aggressive investor and knows how to time the market. At the age of 30, he parks his funds in an equity-heavy pension plan that allocates more than 75% of funds in equities. The market performs unusually well during the first half of the tenure of his plan and his retirement corpus already reaches his expected goal. Tempted, Ramesh continues with his plan and ignores the free switches of funds his plan offers. For the next 20 years, the market gives average returns. Still, his retirement corpus swells to an impressive amount— beyond his wildest stretch of imagination— at only 50 years of age.

    Now would be the right time, if not too late already, to reduce the exposure to equity and switch most of his funds to bonds and G-secs. However, Ramesh decides to play the game a little longer. Time goes by, retirement approaches and his funds keep growing fuelled by unexpected buoyancy. However, as if under a spell, Ramesh forgets to move his funds from the market till the very end of his tenure. And then, misfortune strikes. The market falls and hits the very bottom, and with it goes most of the returns Ramesh has accumulated. His retirement corpus is reduced to peanuts.

    This situation may look like right out from a movie but is possible. In real life, however, it is very improbable, on various counts. One, people are not generally as greedy or foolish as our hypothetical Ramesh is. Two, most pension plans have this feature to automatically alter the allocation ratio with passage of time. The exposure to market gets gradually reduced until it reaches zero at the time of retirement. Three, most pension plans have a minimum sum assured which is independent of market risks.

    To appreciate the exact scale of risk attached to various pension plans, it is necessary to know the various types. The following matrix makes it clear:

    Type of Pension Plans Fund allocation Risks
    Conventional or Regular pension plan 0-20% to Equity 80-100% to bonds and G-secs Minimal, returns will more or less be market independent and shock-proof
    Balanced Pension Plan From 20/30 to 60% : Equity Rest in low risk instruments Moderate, returns will get affected substantially by market fall
    Unit Linked Pension Plans or Pension ULIPS More than 60% to Equity Rest in bonds and G-Secs High risks, will result in considerable erosion of returns accumulated in case of a sudden fall in market

    It is to be noted that there are many ULIPs that actually fall in the balanced type in terms of their fund allocation. Also, recent mandates from PFRDA (Pension Funds Regulatory and Development Authority) require even conventional plans to invest a certain percentage of funds in equities. The same body is also ruminating making it mandatory for pension plans to guarantee returns.

    To use the clichéd ‘basket and eggs’ analogy, if you put all your eggs in a few baskets, you are more prone to market risks. If you have followed the standard practice of diversification of funds instead, there is more safety for your investment from volatility.

    Finally, it is to be noted that pension plans have a certain exposure to market no matter how conventional. That doesn’t imply one must not consider investing in ULIPs. One must understand that market volatility is not unidirectional. If the market falls steeply sometimes, there are also times when it peaks to new heights. Over a long period, things can even out. This makes pension plans, which are generally long term investments, relatively safe. Nevertheless, one must stick to the golden rule of investing more and more in equities in the beginning and switching to low risk instruments in a gradual manner.

    How one should do a fund planning before buying Pension plan
    Rakesh bought a pension plan that promised a return of Rs.1 crore for Rs. 7,500 p.m., which he reckoned should be a tidy sum to get at his superannuation. At 30 years of age and with an annual income of 7 Lakhs, an investment of 90000 per annum is something he could spare without batting an eyelid.

    Did Rakesh miss the plot? Let’s find out what’s amiss.
    An investment of 7,500 per month can yield Rs. 1 crore over a 30-year period @ roughly 8% annual rate of return compounded monthly.

    However, what Rakesh missed is not the mathematical aspect of his investment.

    Fallacy of estimation or ignorance of inflation
    • One crore may look like a neat sum now, but assuming a 5% inflation rate, which is a very modest assumption by today’s standard, one crore will have a value of around 12 Lakhs after 30 years at today’s prices.
    • Also, a retirement corpus of one crore invested in an annuity plan, which again doesn’t yield more than 8% return, can pay a monthly pension of around Rs. 80,000, assuming a post-retirement life of 20 years. But the practical reality of inflation means this amount will be equivalent to roughly 10,000 rupees at today’s prices.
    • So unless he did not plan on purpose to lead a life at one-fifth of his pre-retirement monthly income, Rakesh has either grossly underestimated his future requirement or forgotten to factor in inflation.

    Efficient fund planning: Direct Equities and Equities Mutual Fund
    To avoid being in a precarious situation, as no doubt Rakesh will find himself in at retirement, you need to make your funds work harder.

    A conventional pension plan may fall spectacularly short in achieving your goals. But Unit Linked Plans with significant charges upfront, may not give desirable returns.

    An obvious solution may be investing in direct equities or equities mutual fund. But investing directly in stocks would require an understanding of how stock markets work, the knowledge of timing the market, and a high appetite for risk. However, you wouldn’t like to risk it all in the market, even if you are aggressive and count yourself on developing an understanding of the market fast. It is your retirement planning after all.

    Today, many fund houses have come up with their own version of pension plans. The benefit with mutual funds is your funds are invested in a diverse group of high performing stocks under the expertise of professional fund managers cut for the job. A return of 12% is common with mutual funds invested over a long time horizon. The risks in this case are fairly negated by the expertise of fund managers and the length of investment.

    Had Rakesh invested in these, his retirement corpus would be close to 2 crores with the same investment i.e. 7500 rupees per month.

    Other things to incorporate in your fund planning
    Even if investing in equities is an attractive proposition, your fund planning for retirement must not rely solely on equities as they are associated with market risks. A wise strategy is to put a part of your investment in debt instruments and pension plans. You can consider the following low risk options:

    • Public Provident Funds: PPF’s can give returns close to 9%. As the rates are declared at the time of beginning you can be assured of the returns. But the biggest advantage with PPF is these are tax-free, unless you make premature withdrawals. The long lock-in period also helps to build a corpus by instilling a saving discipline. Investing in PPF will thus lend a stability to your fund planning.
    • National Pension Scheme: NPS can be another great option for retirement planning. Since your funds are invested in a mix of equities and debts under NPS, the returns can be substantial.

    The upshot is, before buying a pension plan, you must do a fair bit of planning. Don’t settle for a conventional pension plan if you want to build a meaningful corpus without which your

    annuities will fail to match your requirements. Also do not depend on ULIPs, as charges are high and you do not get a good value for your money. The trick is to diversify. If you have found a good plan that suits your requirement, great. But don’t stop at that. Distribute your investment fairly among stable options. After all, you would not want to repeat the mistake Rakesh did.

    Which is more beneficial for Pension between ULIP and Mutual Fund
    Pension or retirement plans are for the future. There are pension plans offered by insurance companies that pay a lump sum at the end of the maturity as well as provide annuity after the vesting age. In case of ULIPs or mutual funds, they do not provide annuity. However, people can still invest in mutual funds and ULIPs to build wealth for old age and use them for their expenses.

    Annuity is nothing but monthly withdrawal of the sum from your corpus. The difference is that a pension plan gives you the corpus in the form of annuity, while ULIPs or mutual funds build your corpus. You can use it as annuity by withdrawing a certain amount or simply get the fund value in when you need it, or as instalments to replace your monthly income.

    Just like mutual funds have many options based on the proportion of equities and debts, ULIPs too give investors options where they can choose between different mix of equities and debts.

    Here, we look at building wealth for retirement with respect to ULIPs and Mutual funds.

    1. Sum assured
    ULIPs pay you either of the sum assured or fund value, whichever is higher at the time of maturity. Hence, you are assured of a sum at the end of the maturity. The sum assured is part of insurance coverage provided by ULIP along with investment.

    In case of mutual funds, there is no sum assured. Mutual funds, just like ULIPs, are market-linked securities where the return depends on how the market performs. Despite being market-linked, ULIPs are able to provide sum assured because a part of your premium goes towards insurance coverage.

    2. Flexibility to switch plans
    In case of ULIPs, if you are not comfortable with the plan, you can switch over to other plans. You don’t have to redeem and then buy a new ULIP. The underlying scheme can be changed either for free or by paying a nominal amount. Investors who have selected an unsuitable scheme for their needs can switch over to the right one by paying a nominal fee. In case of mutual funds, if you want to switch to a new mutual fund, you have to redeem the existing one and buy the new one.

    3. Expense & charges
    Since ULIPs provide insurance and investment bundled together, its expense charges are higher. These charges used to be higher a few years back, but now the charges have been lowered after IRDA changed some of the rules governing ULIPs to make it a better product.

    In case of mutual funds, the charges are lower. All the charges incurred in running mutual fund investments are bundled together under expense ratio. The charges have been capped at 2.25%. Even though this is the maximum expense ratio an AMC (Asset Management Company that runs mutual funds) can charge from its investors, many funds charge even lesser than this. Some of the funds such as index funds have even lower expense ratio such as 1% to 1.5%.

    While ULIPs looks more expensive prima facie, but over 10 years or more, the overall annualized expenses are similar to what mutual funds incur.

    4. Risk and return
    The risk in mutual fund is relatively more as there is no sum assured. Hence, if the market crashes, mutual funds may lose heavily. The ULIP will also entail some losses but the sum assured will still be guaranteed.

    5. Maturity period
    Maturity period doesn’t have any meaning in the context of mutual funds. Mutual funds have neither a lock-in period nor a tenure of maturity. You can buy and sell mutual funds any time. There are some mutual funds, known as closed funds, which have lock-in period of 3 years. You can redeem these after 3 years. These are mostly used by investors for tax saving purpose.

    ULIPs, on the other hand, have a maturity period. Premature withdrawal attracts charges unless there is a provision for the same. There may be partial withdrawal option in ULIPs that allow investors to withdraw part of the fund value before the maturity date.

    Finally, both the investments are market-linked. If investors want to invest in mutual funds for pension, they can take insurance separately. In case of ULIPs, both are bundled together. Select the fund that meets your retirement requirement.

    importance on Pension policy
    Everything has a final date attached to it, including your working days. Irrespective of how much you may be earning or how active you may be physically, there will come a time where you may not be that active and need a regular flow of income to cater for your day-to-day financial needs.

    Pension plans come in handy in such a situation, as they are tailor made to offer pay-outs or annuity to ensure you are able to maintain your regular living standards with income post your active working years.

    Reasons why a pension plan is a must-have in your financial planning arsenal
    • Increasing life expectancy: Improved healthcare and rising life expectancy means that individuals live longer today than ever in human history. To ensure a sustained and healthy living, a steady income flow is essential. Post active working years, a pension plan with its regular pay-outs help such an income flow.
    • Changing social behaviors: Changing social behaviors mean that more people today are living in nuclear families. In your old age, you may be living separately from your children. Thus, having an independent financial income becomes non-negotiable.
    • Shortfall in government pension plans: You may have some pension with various government pension schemes like EDLI but that alone is not sufficient to cater to your long term post-retirement financial needs.
    • Financial freedom: With a pension plan offering regular pay-outs, you have financial freedom to make use of funds as and when you like and for all your needs.
    • Rest and relaxation guarantee: More importantly, a pension plan provides financial assurance, offering peace of mind and relaxation without any unwanted stress related to financial matters.

    What if you are late to plan for retirement?
    The good thing about pension plans is that with a wide range of plans like immediate annuity, deferred annuity, unit linked plans, and traditional endowment plans, there is always a pension plan suitable for needs of each individual.

    Take the case of Mr. Gupta, 55 years of age, who did not plan for his pension actively. Fortunately for him, opting for an immediate annuity pension plan can ensure that the plan can pay an immediate annuity on payment of a lump sum amount as premium.

    Mr. Gupta opted for LIC Jeevan Akshay-VI immediate annuity plan which entitled him an annuity regularly with options to avail the same either monthly, quarterly, half yearly, or annually. This way, Mr. Gupta made sure that he was entitled for regular pay-outs or annuity for his entire lifetime and not having to worry about taking care of his post retirement day-to-day expenses.

    Comparatively, Mr. Sunil, a 30-something working professional seeking retirement planning, opted for a traditional endowment plan offering deferred annuity payments. With time at hand to ensure a higher financial corpus till his retirement age, Sunil opted for SBI Life Saral Pension Plan, ensuring that his pension plan was low risk offering assured returns at maturity. The plan also offered him the flexibility to extend the accumulation period or defer the vesting date up to 70 years if he so desired, making the pension plan customized for his needs.

    So, the earlier you start your retirement planning, the more options and benefits you end up with in terms of pension plan products and return on investment.

    Is loan facility available against Pension policy
    A life insurance policy is basically meant for ensuring a protective cover. However, nowadays it is increasingly considered as a versatile investment option that gives the policyholder the benefit of availing loan against the policy.

    Loan against insurance policy is a good option when an emergency fund requirement arises and can be a better alternative to a personal loan or credit card loan, or asking friends and relatives for financial help. With a lower rate of interest, this medium of availing loan is becoming popular among customers.

    However, there are various factors one needs to keep in mind before opting for a loan against a pension plan. Typically, a pension plan has two phases – accumulation phase and vesting phase. During the first phase of accumulation, funds get accumulated through paid premiums and money gets accumulated throughout the plan tenure. This money then gets invested in IRDA-approved securities. Vesting phase is when one starts getting pay-outs.

    Eligibility criteria for loan
    One needs to first check whether the pension policy has a loan facility or not. One can take a loan against the surrender value of whole life insurance, but not against term insurance. Since term insurance does not contain any cash value and expires at the end of the term without earning any returns, it suffers from the limitation of not providing loans.

    Ideally, when one avails a loan against a policy, it is akin to borrowing from yourself. Hence, the process is much easier and is devoid of any intense scrutiny or stringent approvals. Instead of income, the credit worthiness of the borrower becomes the deciding factor or disbursing the loan.

    Loan Amount
    Before availing a loan, you need to check the eligible amount with the insurance provider. Generally, the loan amount is a percentage of the surrender value of the policy and can range up to 75-85% of the same. Again, not all unit-linked policies provide loans—a lot depends on the current value of the corpus and the type of fund. One advantage of loan against insurance policy is that, like any other loan, it is not taxable and that is because the loan amount is not recognized as income by Income Tax authorities.

    Interest charged
    For loan against pension policy, the interest rate charged is based on the premiums that have already been paid, type of plan, and market conditions. The more the premium amount and number of premiums paid, the lower the interest rate charged. However, the rates are much lower than normal bank rates.

    Upon taking a loan against policy, policyholders however need to continue paying premiums. In any event where the policyholder abstains from doing so, some insurers may terminate the policy.

    Loan Repayment
    In case you avail a loan against the pension policy, make sure that the repayment is done within the term of the policy. Policyholder has an option of either paying back the principal along with interest or only the interest amount. In case of the latter, the principal amount due will be deducted from the claim amount at the time of settlement.

    Benefits of Unit Linked Pension Plan (ULPP)
    After active working years the last thing anyone would want is the worry of income for their sunset years. Retirement planning by opting for pension plans offers a good option to ensure the sunset years of life are made easy with regular annuity and enough liquidity to ride any financial crisis.

    Unit Linked Pension Plans, also commonly known as pension ULIPs or ULPPs are one such long term investment options that cat cater for financial protection for the later years. Being a market linked pension plan, the chances of accumulating a better return over a long period of time is higher with unit linked pension plans.

    Unit Linked Pension Plans
    Unit linked or equity market linked pension plans may not sound like an ideal combination at the first glance. The high risk of equity market investment may not necessarily ensure a substantial protective corpus post retirement. Many Pension ULPPs today offer assured protection of the principal amount, ensuring the premiums paid are safe at all times without having to worry about market volatility.

    Unlike in the past where pension plans were mainly investment oriented and did not necessarily offer a life cover, plans today are mandated as per Insurance Regulatory and Development Authority of India (IRDAI) to provide a life cover with a minimum guarantee of 4.5%.

    Benefits and features of Unit Linked Pension Plans
    Unit Linked Pension Plans or ULPPs pool in the premium money accumulated and invest the same in various market linked equity and debt instruments. The policyholder can choose the quantum of investment in the equity and debt component as per their preferences.

    For example, if a 30 year old opts for a Unit Linked Pension Plan, the initial years can have a 100% equity component allowing the funds to maximize their earning potential.

    Unit Linked Pension Plans come with many attractive benefits and features including:

    Market linked returns: Unit Linked Pension Plans have the capability to offer higher returns as they are market linked. As a long term investment option even the market volatility may not dampen the earning potential of such pension plans.

    Flexible investment choice: Just like unit linked insurance plans, unit linked pension plans or ULPPs allow investors to choose the asset allocation of the fund. They can choose from 100% equity to a 100% debt or a mix as per their risk taking ability and personal financial profile.

    Easy switching option: Unit linked pension plans come with an easy switching option between various funds for the policyholder at various times during the policy term.

    Tax benefits: Premiums paid towards unit linked pension plans are eligible for tax exemption under the Section 80C up to a maximum of Rs 1, 50,000. At the time of retirement, policyholders can withdraw 1/3rd of the invested corpus without any tax obligations. The remaining portion must be used to buy an annuity plan to ensure regular income for the sunset years. With unit linked plans the chances of a higher market linked returns makes it a lucrative option compared to traditional or endowment policy plans.

    Long term benefits: Being a market linked plan, unit linked pension plans offer better long term returns. This promotes investors to start pension planning early in life to attain a substantial corpus for the latter years of life after active work.

    Unit Linked Pension Plans At A Glance
    • Unit Linked Pension Plans offer market linked returns pooling the premiums of policyholders for investment in equity and debt instruments.
    • Policyholders can choose the asset allocation of funds and move from equity to debt components as per their needs.
    • At the time of retirement, policyholders can withdraw 1/3rd of the invested corpus or 33% of the funds tax free.
    • Being a market linked plan, ULPPs have a chance to attain higher long term returns compared to traditional pension plans.

    What is NPS (New Pension Scheme)
    National Pension Scheme (NPS) is an initiative by the Government of India to give universal access to pension facility to all the citizens of India. In this scheme, there is no fixed upper amount that investors can invest every year. Investment up to Rs 50,000 under NPS is tax deductible, which makes it even more attractive.

    NPS works on a unique Permanent Retirement Account Number (PRAN), which is provided to everyone who opt for this scheme. The objective of the scheme is to provide a retirement income to all sections of society and link the scheme to market-based return model. This scheme is regulated by the PFRDA (Pension Fund Regulatory Development Authority) of India.

    The scheme was launched on 1stJanuary 2004 and covers all central government employees except the armed forces. From 1st may 2009, the scheme has been extended to all citizens of the country.

    The Pension Fund Regulatory and Development Authority (PFRDA) is the regulator of the NPS scheme, while the National Securities Depository Limited (NSDL) undertakes central record keeping. Fund managers are entities appointed by PFRDA and there is a NPS trust to manage investments of all funds.

    Schemes, portfolio, asset mix
    NPS system invests in a host of schemes. These schemes invest in a mix of equities and debt depending upon the preference of individuals. If the preference has not been provided, the asset mix of equity and debt is determined by the age of the individual.

    Investors can change the portfolio mix or allocation ratio of equity versus debt, asset class, and portfolio preferences. All that the investor needs to do is to authenticate using the OTP sent to his or her mobile number.

    Types of NPS Accounts
    There are two types of NPS accounts: Tier 1 and Tier 2.

    Tier 1 account Tier 2 account
    It is a mandatory pension account It is an optional investment account
    No withdrawal permitted before 10 yrs of joining the schemes or 60 Yrs of age whichever is earlier Withdrawal can be made at any point of time
    Minimum annual contribution is Rs.1000 No such restriction

    Exit from the NPS fund
    One can exit from NPS after 10 years of joining or at the age of 60.

    The options are:

    Exit before the age of 60 yrs After the age of 60 yrs
    If the corpus Is less than 1 Lakhs, the entire sum can be withdrawn. Otherwise 20% can be withdrawn. If the corpus is less than 2 Lakhs, entire sum can be withdrawn. If more than 2 Lakhs, then 60% can be withdrawn.

    Death benefit: In case of an unfortunate event of death of the investor, the fund accumulated is given to the nominee.

    Partial withdrawal: First withdrawal is allowed after 10 years, then two more withdrawals with a gap of 5 yrs are permitted.

    Types for annuity: Various options for annuity allowed under NPS are as follows:

    • Annuity for life
    • Guaranteed annuity for 5, 10, 15 years and thereafter
    • Annuity for life is increasing at 3% per annum
    • Annuity for life with return of purchase price
    • Annuity for life with 50% annuity for spouse after the death of the annuitant
    • Annuity for life with 100% annuity for spouse after the death of the annuitant
    • Annuity for life with 100% annuity for spouse after the death of annuitant with the return of purchase price

    Annuity providers: The fund accumulated can be transferred to the entities permitted by the PFRDA. The following are the entities registered:

    • HDFC Standard Life Insurance Company Limited
    • ICICI Prudential Life Insurance Company Limited
    • Star Union Dai-ichi Life Insurance Company Limited
    • Life Insurance Corporation of India
    • SBI Life Insurance Company Limited

    Tax benefits:

    For salaried employees
    • Investment up to 10% of the salary can be claimed as deduction subject to the Rs. 1.5 Lakhs limit of section 80C.
    • An amount of Rs.50,000 can be additionally claimed under section 80CCD
    • 40% of the amount can be commuted tax-free
    • Pension is treated as an income and taxed

    For self-employed
    • Investment up to 20% gross annual income can be claimed as deduction subject to the Rs. 1.5 Lakhs limit of section 80C
    • Additional Rs.50000 can be claimed under section 80CCD
    • Commutation and pension treated similar to salaried class

    Eligibility: Anyone between the ages of 18 to 60 can join this scheme.

    Charges: Charges are very nominal. Fund management, custodian, and other charges are deducted from the fund.

    NPS is an attempt by the government to align pension process in India as per global practices, and to provide maximum benefits based on market returns.

    What is the right age of buying a pension plan
    The need to build a retirement corpus is very important to lead an independent retirement life pursuing your hobbies and enjoying holidays. An independent lifestyle is sustainable only if backed with a financial cushion. A pension plan helps you achieve this.

    Pension plans provide regular income during retirement. Generally, a pension plan is bought to accumulate a corpus, and on retirement or maturity, you can use this fund to enjoy a regular income.

    With increasing cost of maintaining life, only proper planning can provide a safe financial cushion in one’s sunset years.

    How soon should you start investing in a pension plan?
    The pension plan that helps you accumulate a corpus over a period of time is called deferred pension plan, because the pension money or annuity doesn’t vest immediately, but in due course. One has to invest regularly for a defined period in the case of regular premium policies. On maturity or vesting, the accumulated retirement corpus becomes available and you can annuitize the corpus to generate a regular income for life that will support financially during retirement days.

    Two kinds of pension plans are basically offered by insurance companies: Traditional Non-Linked Pension Plan and Unit-Linked Pension Plan (ULPP).

    Traditional plans offer a minimum guaranteed return and peg additional returns to bonuses coming in from the participating debt funds. ULPPs are market-linked products, where the premium gets invested in funds of your choice.

    When to start?
    • Mid 30s: Generally, at this age no one would think about post-retirement scenarios. This is the time when you work hard and make proper utilization of your work life to build a career. However, a foresightedness and sensitivity to future financial challenges can help you build a corpus for your life after retirement.
    • Mid 40s: This is the time ripe to think of retirement and any planning afterwards can simply lead to a dead end. Therefore, the forties are the best time to consider your situation, give realistic projections regarding your future, and have a secured and stress free life.
    • Mid 50s: This is the time which acts like “better late than never” – around this time some serious planning is in the offing. The ageing body would need a health care plan, which is expensive. Instead, having a proper pension plan in place can give you financial shield.

    Assuming the average rate of inflation in India is hovering around 8% (though the recent inflation has been lesser), if you spend around Rs.30000 per month currently, your expenses for the next year would be roughly about 30000 + (8% of 30000), which is about Rs 32,400. In this way, after 15 years, you would need Rs.95,165 to maintain the same lifestyle. But remember, lifestyle preferences are changing!

    This means you need at least triple the amount of current expenses to maintain at least the same lifestyle, after 15 years.

    So, it is advisable to start as early as possible. Early planning makes it possible to develop a corpus, which is ideal for covering you when you have retired from your job.

    Any age is a good age to start thinking of retirement once your income stabilizes and you make a living. The pivotal steps in future planning involve understanding the savings pattern and changing your lifestyle to accommodate the same.

    What is the future value of the current rupee value
    Why do we expect interest from banks when we deposit money in it? Why do we expect bonus from insurance companies when we invest in it, and why do we expect higher value for any investment in future?

    The answer is “inflation” when you look from consumables’ perspective or depreciation when you see it through currency perspective. Things get expensive as times go by. This essentially means that money depreciates.

    Future value of money
    Future value of money simply means that a value of rupee today is more than its value tomorrow. This means a rupee can buy more today than in future.

    This is why when we deposit money in the bank; we expect interest on it because we know inflation eats into the value of money. So the least investors and depositors demand from banks is an interest that covers inflation as well as reward us little extra for foregoing the pleasure which we would have, had we spent that money. This is why the interest rate in banks is marginally higher than inflation.

    The same applies to any investment. Investors invest to get returns which means higher sum in future. The reason is inflation. As inflation goes up, the value of rupee depreciates.

    Nominal value versus real value
    When we talk about the rate of returns, CAGR, Interest rate etc., we discuss nominal value and not the real value of the growth. To find the real return, we have to factor inflation.

    For example, if banks give you 7% on deposit and the rate of inflation is 8%, essentially you are getting negative one percent real return. So the value of your money is actually going down when you deposit this in the bank. This is why when the inflation is high, people expect higher deposit rates and the Government obliges too because it creates incentives for people to deposit money and thus tames inflation to some extent.

    In the same way, if the rate of return on a mutual fund or a ULIP is 12% and the inflation is 7%, then the real return is 5%. The real return is more important because it tells you the real increase in the value of your investment.

    Here is how we find the future value of money
    Suppose the inflation rate is 6% and we want to know what the real value of money is after a year. To find this, we have to discount the rupee value by the inflation rate for the year.

    Since it is 6%, the value of one rupee will be Rs. 0.943. You get it by dividing 1 rupee by (1+inflation rate). If you want to know the value of the rupee after 10 years, first raise (1+inflation) to the power of 10 and then use this value to divide 1 rupee. The value will be 0.558 rupee. Almost 45% of the value will be eroded in 10 years.

    A note on inflation

    The consumer price index or CPI is the measure of inflation. This index measures the inflation in percentage rise or fall from a base value. Usually inflation rises because of increase in demand and overall increase in costs. Inflation is not liked by consumers. However, the opposite of inflation, i.e. deflation is worse than the inflation.

    In deflation, the prices decrease. This is taken as an ominous sign for the economy because this implies that the demand is going down which means companies will produce less. This in turns slows down economic activities, which impacts all aspects of life. Hence a moderate inflation is desirable than no inflation at all.

    What is participating and non participating pension plans
    Of all the classifications of pension plans into various categories, the broadest and often the most ignored, is their classification into participating and non-participating plans. Still, the implication of this categorization is immense. The jargon ‘participating’ and ‘non-participating’ frequently occurs in insurance products but it applies to all kind of pecuniary products, especially to those related to investment in stocks or interest generating avenues.

    Participating Pension plans
    A participating pension plan is one that shares dividends and profits with the plan holder on an annual basis. Like the reversionary bonuses of participating insurance policies, these annual profits are generally accrued and added to the sum assured at the time of maturity or retirement.

    Similar to insurance policies, conventional pension plans also invest the policy holder’s premium in government securities, treasury bonds and other secure debt instruments, after deducting various charges. A part of the funds is also invested in equities. If the plan is participating type, the policy holder is considered a participant in this investment. Naturally, the profits made, if any, during the fiscal, is declared at the end of the year and shared with the policy holder in form of dividends. This profit is actually a bonus and is not related to the ‘sum assured’, which is more or less a guaranteed feature.

    Since the conventional pension plans also bundle insurance with retirement benefits, they deduct mortality charges in addition to other administrative charges. This in effect means that only a part of the policyholder’s premium gets invested. If, despite this limitation, the company has to share most of the profits ensued, the cost will increase. This is the reason why participating plans have higher premiums than a non-participating one.

    Non-Participating plans
    In case of non-participating plans, bonuses or benefits or returns are pre-defined. These can be linked to an index or declared at the outset. In effect, the policy holder starts these plans with the knowledge of the returns he will likely get. Funds under these plans go the routine course and grow in a normal way till maturity when the accumulated returns are paid as a lump sum.

    The difference
    • In a participating pension plan, performance of the surplus funds determines the dividend. But it is the discretion of the company to declare bonuses, and pay whenever and howsoever the company chooses.
    • In participating plans, the funds may not register profit in a particular year or the company may decide to adjust profit against a premium. The company may also decide the ratio in which to distribute profits. General practice is to share 90% of the profit with the policy holder as dividend and keep 10% as company’s profit.
    • The dividends in participating plans, once declared, become guaranteed and normally are accumulated at a simple interest till maturity and are paid with the sum assured.
    • All returns in a non-participating plan, however, are non-discretionary. It is not the discretion of the company to dictate terms. The company cannot choose to alter the returns or mode of payment of the same in any way other than what was declared at the time of purchase.
    • The returns in a non-participating plan may be subject to tax but the bonuses in form of dividend paid by a participating plan are exempted from tax.

    What is the tax benefit of buying Pension plan
    Pension plans are one of the best ways to ensure a steady income post the active working years. To promote more and more people to opt for pension plans, the government offers various tax benefits for pension plans.

    The tax benefits and tax advantages offered by pension plans are as outlined below.

    Tax benefits on premium payment: Pension life insurance plans offer the benefits of tax deduction for the premiums paid for the policy. Any investment in a pension plan by way of premium payments qualifies for tax deduction under Section 80CCC of the Income Tax Act. It is important to note that the deduction is offered under Section 80CCC and is not over and above the Rs. 1.5 Lakhs deductions offered under Section 80C. The aggregate amount of tax benefits under Sections 80C, 80CCC, and 80CCD (1) are capped at a maximum limit of Rs. 1.5 Lakhs. Furthermore, tax deductions under Section 80CCC are only allowed for the financial year for which the amount has been paid as premium for the pension plan.

    Taxation benefits on maturity of the pension plan: As per the regulations of Insurance Regulatory and Development Authority of India (IRDAI), a maximum of one-third of the pension plan's corpus can be availed at maturity as a lump sum. Any such payment received in commutation of the pension plan is tax-free under Section 10 (10A) of the Income Tax Act. The remaining two-third of the corpus must be invested into an annuity plan and is paid as annuity, which is taxable as per the income tax bracket of the policyholder.

    Taxation in the event of surrendering a pension plan: Should any pension plan holder choose to surrender a pension plan, the surrender value of the plan is added to the annual income for the policyholder and taxable as per the prevailing income tax brackets.

    Tax benefits of pension plans at a glance:
    • Premium payments for pension plans qualify for tax deduction under Section 80CCC of the Income Tax Act.
    • Deductions under Section 80CCC come with a maximum limit of RS. 1.5 Lakhs.
    • Deductions under Section 80CCC are only allowed for the financial year for which the amount has been paid as premium.
    • 1/3rd maturity amount is tax-free under Section 10 (10A) of the Income Tax Act.
    • Annuity for the remaining 2/3rd is taxable as per the income tax bracket of the policyholder.

    What is Employees provident fund
    Employee Provident Fund is a contributory scheme designed to provide financial security and long term investment / retirement planning option for working individuals. The Employees Provident Fund Organization (EPFO) of India, under the Employees’ Provident Fund Scheme (EPS) 1952, implemented the Employee Provident Fund (EPF).

    Both the employer as well as the employee contribute towards building of a corpus every month, and the employee earns interest on the accumulated deposit every year. Since both the interest and the amount withdrawn at maturity are tax-free, EPF is considered as a good investment option available to the working class.

    Applicability and Contributions for Employee Provident Fund
    Any employee who has completed one year of continuous service or having worked for a period of 240 days in a year except those working in the state of Jammu and Kashmir are eligible for provident fund membership. Business establishments and entities having more than 20 individual employees need to create an employee provident account as per the rules of the Employees Provident Fund Organization (EPFO) of India.

    As per the existing laws defined by the Employees Provident Fund Organization of India, the employer has to contribute a minimum of 12% of the basic, DA along with cash value for food allowance for each individual EPF account of the employees.

    Contribution towards EPF
    The entire contribution of the employee goes to the fund, but the employers’ contribution is divided as follows:

    • 8.33% for EPS (Employees’ Pension Scheme)
    • 3.67% for EPF
    • 0.5% for EDLI (Employee Deposit Linked Insurance Scheme)
    • 1.1% for EPF administration cost
    • 0.01% for EDLI administration cost.

    So, the total contribution by the employer is 13.61%

    EPF Rate of Interest
    Presently for the year 2016-17, the rate of interest is 8.65%.

    • The interest rate is decided every year by the government of India in consultation with the CBT (Central Board of Trustees) and EPFO
    • It is valid for the whole financial year
    • The interest is calculated monthly but payable annually
    • The interest credited is taken into consideration for the next year calculation
    • The employer's contribution towards EPS does not earn interest
    • The interest is tax-free

    EPF Interest Calculation
    • Interest is calculated on a monthly basis
    • The interest is paid on the opening balance of the month, so the first-month interest is zero
    • The employee contributes 12%, and the employer’s contribution is 3.67% as the rest goes to EPS
    • The monthly interest earned is not carried forward every month but the interest earned during the entire year would be added to the balance at the end of the year and carried forward the next year.

    Withdrawals: EPF is a compulsory saving scheme. However, one can withdraw funds at the time of emergencies like for children’s marriage and education, building a house, etc., so this scheme offers a lot of flexibility to the employees.

    Benefits of EPF Scheme
    Tax-free income: Both the interest earned and the amount withdrawn on maturity from EPF is tax-free. One can contribute more and avail deductions under Section 80C.

    Security: EPF offers financial security as withdrawals are not permitted easily but in case of any event like death, disability, loss of job or emergencies, the fund can be withdrawn and utilized by self or family.

    Options: Since a part of the employer's contribution goes towards pension and insurance, the scheme provides different useful options for the employee.

    Ease of use: EPF accounts can be transferred, and one Unique Account Number (UAN) links different account by one person (ie, accounts with different employers), so it offers ease of management.

    EPS scheme is a long term saving option designed to provide finances to the individual at various events of his life. It is thus an essential investment vehicle for all investors and working professionals.

    What are the various Govt pension schemes available in India
    Government of India has launched few pension schemes for the welfare of citizens. Here, we will take a look at the important pension schemes Atal Pension Yojana and National Pension Scheme or NPS.

    NPS or National Pension Scheme
    NPS is a scheme is a voluntary program. People can invest as per their capacity, but the minimum amount is Rs 6,000 per year. Investors can invest as much as they want because there is no upper limit. It also helps in tax saving. Investment up to Rs. 50,000 is tax deductible. This is apart from the maximum limit of 1.5 Lakhs of deduction under section 80C. Hence even when you invest more than Rs 50,000 per annum, only Rs. 50,000 is tax deductible.

    Investing Principle of NPS
    Any investment scheme invests in a mix of securities, which are equities and debts. Debts are called fixed income securities while equities do not promise any fixed income. This makes equities risky investment, but they also offer the potential for higher returns in the long run.

    Any scheme with higher proportion of equities will be risky as compared to a scheme, which invests higher portion in debts. Based on these proportions, schemes can be made for different types of investors. For example, a young person with high risk appetite may select higher proportion in equities because his or her investment horizon is longer. On the other hand, a person with low risk appetite may invest in scheme with higher proportion of debt.

    In case of NPS, investors are given choice to select the mix of equity and debt. If investors are not able to choose, the system does it for them and changes the mix accordingly as years go.

    NPS account can be opened from any bank or online. This generates a PRAN (Permanent Retirement Account Number). Then send your documents to central office of the bank for verification. After verification, you can start investing in NPS.

    Atal Pension Yojana
    Atal Pension Yojana is for workers in the unorganized sector who are vulnerable in their old age because there are no formal pension plan in their name. This is a great initiative by the Government to help the unorganized sector which forms the bulk of employment in India.

    It is managed by the Pension Fund Regulatory and Development Authority (PFRDA). The Government guarantees fixed pension to the investors in this scheme. Under this scheme, the pensioners will receive Rs 1000 per month after retirement with maximum cap of Rs. 5,000. This amount depends on the contribution of individuals subscribing to this plan.

    The prescribed minimum age for Atal Pension Yojana is 18 years and the maximum age is 40 years. The vesting age, i.e. the age when investors start receiving pension, is 60 years.

    Let’s take a look at the monthly outflow for different cases.

    A person of 18 years of age who wish to receive Rs 1000 per month after retirement will have to pay Rs 42 per month till he or she turns 60. Similarly, a person of 40 years of age will have to contribute Rs 291 per month to receive the same after turning 60. If subscribers want to receive Rs 5,000 per month in old age, the same would be multiplies by 5. This means a person of 18 years of age will have to invest Rs 42*5 = Rs 210 per month while a person of age 40 will have to contribute Rs 291 * 5 = Rs. 1,455 per month.

    PPF and EPF (Public provident fund and employee provident fund)
    Finally there are good old schemes of EPF and PPF with best features. EPF is a scheme where the investor and the company contribute toward the provident fund in equal proportion while PPF account can be opened by anyone in their personal capacity. The maximum limit is Rs 1.5 Lakhs per year. The investment is tax deductible under section 80C.

    These are the various pension schemes by the Government of India. You can select one or more than one depending on your requirement and capacity.

    What are the useful tips to decide best pension plan
    Pension plans come in various shapes and sizes and what fits one may not fit another. You have to look carefully at them to choose one that is tailor-made to meet your requirement, or the one flexible enough to let you customize. For this, understanding your requirement perfectly is the first step.

    Here are 10 tips to help you choose the best pension plan.

    1. Your pension plan must be able to build a sufficiently large corpus:
      First, decide the upper limit of your investment. If a monthly schedule suits you, determine how much you can afford to invest each month without affecting your present needs significantly. You can use the rule of thumb which says ‘divide your age by two and the digit you get is the percentage of your monthly income you should put aside for pension savings’. Once this is fixed, you should shop for the plan that promises the highest return on investment. For, insufficient retirement corpus would generate insufficient annuity, thus defeating the purpose of retirement planning.
    2. Check the annuity or monthly pension your plan promises after retirement:
      A good pension plan should generate a monthly income of at least 80% of your present monthly income after adjusting against inflation. For example, if you are earning Rs. 50000 monthly, you should have a monthly income equivalent to Rs. 40000 at current prices, assuming it is invested in an annuity plan that gives 8% return. Anything less may affect your living standard negatively.
    3. Don’t buy a plan that provides life cover if you are already insured:
      You should not buy a pension plan that bundles life insurance with retirement benefits. Remember life insurance comes at a cost. Such a plan entails heavy mortality charges, which results in lower returns because the same is deducted from your premium before allocation. This tip presumes you already have a life plan. Even if you don’t, you should buy life insurance separately so that your funds will have more chances to grow.
    4. Your plan must have a long locking period:
      A larger lock-in period means you cannot touch your retirement funds easily, which you should refrain from in any case. Temptation to dip in your retirement savings to meet contingencies is real and huge. How common it is to take loan against PPF or EPF to purchase a house. There are plans that allow partial withdrawals, while others like ULIPs have more liquidity—some even allow full withdrawals. But liquidity is an undesirable trait when one is looking to build a corpus. You do not want to have even the chance of withdrawing your retirement savings prematurely.
    5. Investment portfolio of your pension plan:
      Do not buy pension plans on promises alone—find out how they will walk the talk. It is your money and it is your business to know where it is invested. Are they investing more in equities or debt? A balanced investment portfolio has a diverse fund allocation, which ensures stability of returns. Depending upon how balanced or skewed you want your funds in favor of or against equities or debt, you can classify a pension plan. For early starters choosing an aggressive investment portfolio, one that has over 60% fund allocation to equities is not a bad idea.
    6. Hidden charges and other costs:
      Reading the fine print of your policy document is very important. If you see an asterisk symbol, T&C (terms and conditions), a dollar sign, or ampersand, do take the time to read the related clause under them. Take expert help if you must. Often times, hidden charges and other limiting conditions are communicated using these devices.
    7. Tax benefits:
      Find out what your pension plan says about taxes. A regular pension plan will have tax liability attached with premature withdrawals and also with annuities.
    8. Type of plan:
      Pension plans are classified into three categories: Conventional, Balanced, and Unit Linked in increasing order of market exposure, i.e. conventional plans are safest of the lot and also have the lowest return rates. Match your requirement and risk appetite to these types before making a choice.
    9. Effective rate of return:
      If your plan gives 8% returns and the rate of inflation is 6%, the effective return will be 8-6=2%. If your plan is unable to beat the inflation rate, its effective return is negative. Inflation consideration is a must before choosing a plan.
    10. Participating or non-participating plan:
      You should also check whether your plan is a participating or non-participating plan i.e. whether it declares the dividends and bonuses or not. You want transparency from your pension planner.

    What is Public provident fund
    When it comes to secure long-term investments, few options can match Public Provident Fund (PPF) in returns, safety and tax exemptions. Since the PPF is a statutory scheme operated by the Government of India, it is one of the most secure investment avenues. The returns are not subject to the vagaries of the market forces. The only disadvantage is its liquidity, but with its tax benefits, PPF continues to be an apt investment vehicle for a small investor with low risk appetite.

    Key Features of PPF:
    • The minimum investment required to start a PPF account is Rs.500 and the maximum is Rs.1,50,000, provided that the total number of instalments does exceed 12 in a financial year.
    • PPF Deposits can be made as a one-time lump-sum or in 12 installments
    • The current interest rate of PPF is 7.9% per annum (compounded yearly). However, the total interest is added back to the PPF account only at the end of the year. Remember that the interest is not compounded monthly.
    • The maximum duration of a PPF account is 15 years, but it can be extended in a block of 5 years at the end of the maturity period.
    • Premature closure of PPF account is not allowed before 15 years, but you can withdrawal from your account, from the 7th financial year from the year of opening of the account.
    • You can avail loan from your PPF account after 3rd year.
    • PPF Deposits qualify tax rebates under Section 80C of IT Act.
    • PPF Account can be opened by cash/ Cheque
    • You can appoint a nominee for your account and can also transfer your account across branches anywhere in India

    Other Benefits of PPF:
    • The interest earned in PPF and the lump sum amount at the end of the maturity period is completely tax free, which is an added attraction.
    • From the 7th financial year onwards, you can withdraw upto 50 per cent of the lowest amount of the balance either at the end of the 4th financial year or the financial year prior to the year of withdrawal.
    • A Loan up to 25% of the amount of the credit at the end of the first financial year is permitted after the end of the 3rd financial year.

    Interest calculation:
    PPF does not calculate the interest on the average monthly balance, but on the lowest balance between the end of the 5th day of the month and last day of the month.

    Tips for investing in PPF:
    • If the amount invested is a lump sum, always deposit the amount during the beginning of the financial year. Never deposit during the last quarter of any financial year because the accrued interest is low.
    • If you have decided to deposit in instalments, start investing from the first quarter rather than the last one.
    • Avoid depositing the amount after the 5th of any month.
  • Q: What is a pension plan?
    A: Pension plans are also known as retirement plans where one allocates a part of the savings which then accumulate over a period of time offering steady income stream post retirement. Pension plans offer the dual benefit of life insurance along with investment benefits offering maturity benefits for the policyholder. In the event of unfortunate demise of the policyholder during policy tenure, a pension plan offers the beneficiary a sum assured along with accumulated bonuses.
    Q: What is annuity in a pension plan?
    Retirement plans or pension plans offer the policyholder regular payouts post their working years. These regular payouts given by the pension plan can be used towards financial well being and management of day to day expenses. Such payouts given by pension plans are known as annuity. Annuity can be availed either every month, every quarter, half yearly or annually as per the selected pension plan and the financial needs of the policyholder.
    Q: What is the difference between deferred annuity and immediate annuity?
    Annuity is broadly classified as deferred annuity and immediate annuity depending on how soon or late the annuity begins in a pension plan. A deferred annuity plan allows for time for a financial corpus to get accumulated with regular premium payments. Once the policy term is over, the plan offers annuity payouts as per the timeline preferred by the policyholder. In an immediate annuity plan, the annuity payouts start immediately as the policyholder needs to deposit a lump sum amount with the pension plan to avail the regular immediate annuity.
    Q: Why should I consider opting for a pension plan?
    A: Pension plans offer a dual benefit of life insurance along with investment option for the sunset years of life. With a pension plan you can make sure you have some sort of a pension income to take care of the day to day financial needs and maintain your standard of life even after your active working years. With the rise in inflation, a normal savings account of saved money may not be sufficient for your later years and pension plans offer a great way to ensure financial freedom in the sunset years.
    Q: Is pension plan required if I have a PPF account?
    A: A provident fund account is a good way to ensure adequate savings but that alone may not be sufficient to cater for the financial needs of the future. Rising inflation, growing medical needs and rising medical costs all can add up a substantial amount and a pension plan can ensure the annuity paid out is regular to tackle any of such expenses.
    Q: How much money should be good for my retirement corpus?
    A: The amount of money you may need as your retirement corpus will depend on your financial needs, your quality and standard of living, your retirement timeline and the average life expectancy. There is no fixed number that is a safe for all as a retirement corpus. You can make use of various retirement corpus calculators to reach for a conclusive amount for your financial corpus for retirement.
    Q: What are various types of pension plans available in the market?
    A: Pension plans can be divided into three types. First is on the basis of annuity, the second is on the nature of investment and thirdly on the basis of policy tenure. Annuity bases pension plans can be either deferred annuity plans which pay annuity at a later stage or immediate annuity plans paying an immediate payout. Pension plans are ULIP based investing in equity and debt instruments or traditional ones investing only in safer debt instruments. Policy tenure pension plans are either ones offer annuity for life or those offering limited annuity for a prefixed number of years.
    Q: Do pension plans offer any tax benefits?
    A: Yes pension plans offer tax benefits as all the premiums paid for such plans allow for a tax deduction of up to Rs. 10,000 under Section 80CCC of the IT act. Also on maturity, the policyholder can withdraw 1/3rd of your accumulated pension funds without paying any tax.
    Q: What do I get as a maturity benefit for pension plan?
    A: On maturity the pension plan offers a maturity benefit for the policyholder. 1/3rd of your accumulated pension funds are paid out as a lump sum which is tax free while the remaining 2/3rd is paid out as annuity and is taxable as per the income bracket.
    Q: What is vesting age for a pension plan?
    A: Vesting or vesting age is the time at which the policyholder will start to receive the pension or annuity. For immediate annuity plans, vesting age can be the current age of the policyholder as payouts start immediately. For deferred annuity plans, the average vesting age starts at around 50 years with a maximum upper limit of 70 years.
    Q: What is surrender value of a pension plan?
    A: Pension plans come with the option of surrender of the policy before the tenure should the policyholder chooses to exercise such an option. The surrender value is the amount of money the policyholder will get if he decides to surrender the pension plan before its due date. A surrender value is available only with plans that offer a saving option for the policyholder. Pension plans with no savings component offer no surrender value. Even with plans offering a savings component, a policyholder looses all benefits including life cover in the event of policy surrender.
    Q: What are the advantages of opting for a pension plan?
    A: Pension plans allow you to plan your retirement years effectively allowing for a regular source of income even after your active working years. Pension plans also offer a life cover ensuring that in the event you are unable to witness the policy tenure; your nominee will be the beneficiary of a sum assured paid at the time of death of the policyholder.
    Q: What is meant by accumulation phase of a pension plan?
    A: Accumulation phase is the period where you as a policyholder pay premiums for the pension plan for a benefit at a later stage in terms of a payout or regular payouts. Usually pension plans allow users to pay any amount of premium with no upper limit so that the policyholder can attain a high financial corpus for the pension fund in the long run.
    Q: What is Employees Provident Fund (EPS)?
    A: Apart from a pension fund users have the option of investing in Employees Provident Fund or EPF which is primarily an insurance scheme regulated by the government. Under the EPF scheme employees make a 12% contribution from their income towards the scheme along with an equal contribution by the employers. While EPF scheme offers decent returns, they alone do not safeguard the financial future post retirement. For best result an independent pension plan should be opted for along with EPF to make the best possible financial plan for the sunset years.
    Q: What is the Pradhan Mantri Atal Bima Yojna?
    A: Pradhan Mantri Atal Bima Yojna is a pension savings product offering a fixed pension to the subscriber once he attains 60 years of age. The government matches half the contribution of the subscriber, or Rs.1, 000, whichever is lower. So if a subscriber saves Rs. 2000 in one year, the government would put in Rs. 1000 as a financial corpus for the future. Once the subscriber reaches 60years of age, Pradhan Mantri Atal Bima Yojna offers monthly payouts along with a death benefit to the nominee of the policyholder.