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Pension Plans – Advantages and Disadvantages

Pension Plans Advantages & Disadvantages

In the past, Pension planning in India did not extend beyond investing money in long Term government instruments or opening fixed deposits with banks. Times have changed and the approach towards pension plans and retirement plans should also change accordingly. Indians are living longer.

The current life expectancy is around 65 years as people have access to better medical care and this is expected to rise to 75 years by 2050.. Global integration means that a second honeymoon trip to Disneyland at the age of 60 years is not as far fetched as it once sounded. In such a scenario, it is advisable to learn more about the pros and cons of going in for a pension Policy to avoid monetary problems after retirement.

Advantages of Buying a Pension Policy

Automatic long term savings
Irrespective of whether you choose the one time lump sum payment or multiple small payments approach, you will be Assured of long term savings. Unlike an endowment insurance policy, pension plans focus on creating an Annuity which can be further invested to generate a steady cash flow after you retire.

Negate effect of Inflation
Pension plans are designed to negate the disastrous effect of inflation. The plan will offer a lump sum payment at retirement amounting to maximum of one-third of the corpus accumulated and the balance two third value of the corpus will be utilized to generate steady cash flow for recurring expenses.

Different strokes for different folks
One has numerous options depending on one’s retirement age and retirement plans. One can pay a huge lump sum amount of Rs. 5 lacs and start receiving the annuity payments immediately. Or, one can go in for a Deferred Annuity plan thereby allowing the corpus to earn more interest before the payout begins.

Traditional or ULIP- choice is yours
You can go in for pension plans that will invest your funds in not just ultra safe government securities but riskier debt and equity investments as well. This increase in Risk will be balanced by a significant increase in the returns generated by the investment. This will ensure you have a huge corpus in your hand at your retirement age, which will help you maintain your lifestyle without any complications or loss of independence.

Insurance can be combined with the pension policy
One can go in for pension plans that will offer the lump sum payout upon the retirement or death of the individual, whichever occurs earlier. This means that the pension policy can be used to bolster your life insurance Coverage as well.

Option of enhancing nature of protection using riders
The pension policy can be tweaked to receive lump sum payouts in the event of critical illnesses or disabilities due to accidents. The policy can be used to bolster one’s long term health care related cover as well.

Disadvantages of Buying a Pension Policy

Difficulty in anticipating future requirements
Nothing can be more frustrating than discovering that the annual payout offered by the retirement policy is not enough to take care of your post retirement expenses. This problem is real and unavoidable. From a sudden downturn in the global economy or unexpected increase in inflation to poor management of the corpus by the insurer- there are many possible reasons why your pension policy payout may prove inadequate. Regular analysis of the market conditions and performance of the policy will help minimize this risk.

High returns come only with a high risk strategy
Traditional and safe investment options may not be adequate to negate the effects of inflation. The pension policy holder may have no option but to adopt a high risk high return approach to ensure the payout is adequate at the retirement age.

Latecomers lose a lot
There will be a huge gap in the returns earned by an individual obtaining this policy at the age of 21 years as compared to 30 years or 35 years.

Tax liability
The annuity received post retirement is, as on date, taxable. This can significantly dent the cash ultimately available for your personal utilization.

Limited tax deductions on Pension plan premiums
The maximum deduction allowed on life insurance premiums, pension plan premiums and other long term savings under the Income Tax Act is Rs. 1 lac. This means planning for one’s retirement will not bring down one’s tax liability in the present.

Despite the disadvantages, there is no denying that buying a pension policy is a sensible decision as far as planning for retirement is concerned.



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