The one thought that sure to give jitters to any salaried individual is the thought of leading a stressful post retirement life. Quite obviously, almost every concerned salaried individual invests in some or the other pension plan in the hope of securing a peaceful and happy post retirement life. But often, unawareness about the pension leads to a mayhem and investors are a left in a lurch, without adequate post retirement cover. That’s why it makes sense to get acquainted to some eye-popping facts about pension plans well in advance.
To help you out, here we present to you 3 such eye-popping facts about pension plans.
So, let’s check them out now!
1. It’s Important to Buy Annuity – We’re sure you must not be aware that you need to buy an annuity plan when investing in a pension plan. In fact, you need to buy an annuity plan for two-third of the accumulated corpus. Now, why is that? Remember, pension plans are long term insurance plans and if you’re a salaried individual and plan to settle outside the country, you would definitely like to take the money with you, rather than get nominal pension amount in India. Or you may need money to fund your child’s higher education or marriage during the term of the policy. So, without an annuity plan, you wouldn’t be able to do that. Therefore, it is important to important to buy an annuity plan when investing in a pension plans in India.
2. Tax Liabilities Are Higher In Pension Plans – Tax saving remains a major concern for any salaried individual. No one wants to give a substantial portion of their hard earned money in undue taxes, leave aside the money that they are saving for their retirement. But you’ll be surprised to know that only one-third of the maturity amount in pension plan is tax-free. This is a huge blow to those savings their money in order to build a huge retirement corpus. If you have been saving taxes, you probably already know that withdraws in PPF and equity MFs are absolutely tax-free. In addition, the pension that you get to earn with pension plans is taxable too. This proves to be a double whammy for the investors.
3. Pension Plan Kill Investment Flexibility – Pension plans are essentially long term investments. This means that your money is tied to one fund for decades. This kills the flexibility of your investment and any chances of building upon that investment. With only a few fund options to depend on, your investment in pension plans becomes highly concentrated and makes the overall flexibility of your investment funds suffer. In addition to all this, it is also not easy to prematurely exit from pension plans.
What Should You Do?
Given the facts above, it’s no rocket science to understand that pension plans are not always the best of investments. Given the clearly identifiable benefits and investment benefits of PPF, EPF and Equity Mutual Funds over pension plans, it makes sense to invest in such plans, rather than going for pension plans in India.
If you choose to invest in PPF, EPF and Equity Mutual Funds, you may choose to withdraw your entire amount with benefits, whereas you get to withdraw just 25-30% in pension plans. In addition, the withdrawals in totality are tax-free with PPF, EPF and Equity Mutual Funds. So, you may choose to invest in one such product and build a retirement corpus with these products. You may then invest this amount further in annuity or other good insurance products and set up a regular monthly income while keeping your corpus intact.