Skip to main content

Where to Invest for Retirement - A traditional pension plan or a unit-linked pension plan?

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

 

Traditional pension plans offer a minimum guarantee, but higher exposure to equity in the case of Ulips could be more beneficial over the long term

Pension plans of insurance companies should carry a warning--when it comes to retirement planning, these are more expensive and don't offer the tax benefit of instruments such as Public Provident Fund (PPF) and National Pension System (NPS). PPF is exempt from tax at the investment, accrual of interest and withdrawal stages, while NPS is cheaper (the commission paid to fund managers is just 0.25 per cent).

In the case of pension plans from insurance companies, the annuity paid is taxed at the hands of the policyholder. And, the commissions and charges are higher than NPS. But if you have invested in PPF and NPS and still want to save for retirement, you could consider pension plans. These help you accumulate savings and build a retirement corpus. A third of this corpus is commuted, meaning it is paid to you on maturity. This amount is tax- free. The rest is used to give you regular income through an annuity plan; this income is taxed.

By providing a tool to accumulate and invest your savings, these plans give you a lump sum on retirement, then used to get regular income through an annuity plan. Given the high cost of living and rising inflation, employer pensions alone aren't sufficient.

Within pension plans, there are unit linked and traditional ones. The basic difference between the two is the kind of instruments these invest in. So, how does one decide which is best for him/ her? Traditional plans are more oriented towards investment in debt funds, as these have a certain guaranteed sum assured for policyholders at the end of the tenure.

A major part of their investment, about 60 per cent, is in government securities. That is why it may not be possible for a traditional plan to give returns that beat inflation.

In the case of a unit- linked or market  linked pension plan, a policyholder can choose the investment limit he/ she wants for equity investment. But market risks are involved, as the investment is linked to equity markets.

If you are starting your retirement planning early, you could go for ULIP (unit- linked insurance plan) pension plans, as these would give better returns. Traditional plans wouldn't give very high returns because of the cap on investments prescribed by the regulator.

They allow the policyholder a choice of funds, along with investment in equities, which helps in faster accumulation of funds with growing markets

Ulips also give the policyholder an option to switch between the investments (debt and equity) three to four times a year. But this would help only if a policyholder understands the market risks and is able to switch at the right time.

According to Insurance Regulatory and Development Authority guidelines, both traditional and Ulip pension plans have to provide minimum guaranteed returns, as these are aimed at building retirement corpuses. Traditional plans guarantee a minimum sum assured, along with bonuses, if any, while Ulips provide a minimum guarantee of about 4.5 per cent.

Ulip plans go through the vagaries of the stock market. So, the returns may not be as high as expected, while traditional plans, with their debt outlook, are a more trusted partner, though these have slow wealth accumulation.

Therefore, as an investor, I need to know what product I would want to purchase, according to my appetite.

As bonus is discretionary, not mandatory, customers choosing a traditional plan should look at the past record of companies in paying bonuses. The company offers both Ulips and traditional pension plans; there are sets of customers for both.

Another advantage of Ulip plans is the option to top- up or increase your investment. This could help inflate the investible amount, which, for a pension plan, is beneficial to build the overall corpus through the long term. For a traditional plan, there is no such option.

While equity gives better returns through the long term, according to the new regulations, insurers have to give a nonzero guarantee, even on Ulip pension plans.

Therefore, there are chances companies offering Ulip pension plans would also invest substantially in debt market, as the equity exposure is limited. Hence, their returns might be less than in the case of pure equity investments.

In terms of costs, Ulip plans score over traditional ones, owing to transparency. Traditional plans are cost- heavy and opaque, unlike Ulip plans, for which all charges are confirmed to the consumer upfront. But a few insurers charge a guarantee fee for Ulip plans.

One should check these before purchasing a plan. Customers should also look at the history of the insurance company, in providing annuity service, as it is now mandatory to buy the annuity from the same company one buys the pension plan from.

|Since equities give good returns over the long term, Ulip pension plans are beneficial if you start before retirement |Charges and expenses are more transparent in Ulips |Traditional plans give minimum assured returns but these might not beat inflation |Check history of insurer with regard to bonus, since it is discretionary and not mandatory

Traditional plans are oriented towards investment in debt funds, as these have a certain guaranteed sum assured for policyholders at the end of the tenure

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

Mutual Fund Review: HDFC Index Sensex Plus

  In terms of size, HDFC Index Sensex Plus may be one of the smallest offerings from the HDFC stable. But that has not dampened its show, which has beaten the Sensex by a mile in overall returns   HDFC Index Sensex Plus is a passively managed diversified equity scheme with Sensex as its benchmark index. The fund also invests a small proportion of its equity portfolio in non-Sensex scrips. The scheme cannot boast of an impressive size and is one of the smallest in the HDFC basket with assets under management (AUM) of less than 60 crore. PERFORMANCE: Being passively managed and portfolio aligned to that of the benchmark, the performance of the index fund is expected to follow that of the benchmark and in this respect, it has not disappointed investors. Since its launch in July 2002, the fund has outperformed Sensex in overall returns by good margins.    While every 1,000 invested in HDFC Index Sensex Plus in July 2002 is worth 6,130 now, a similar amount invested in Sensex then wo...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

National Savings Certificate

National Savings Certificate Here's everything you need to know about the 5-year savings scheme offered by the Government This is a 5-year small savings scheme of the government. From 1 July 2016, a National Savings Certificate (NSC) can be held in the electronic mode too. Physical pre-printed NSC certificates have been discontinued and replaced with Public Provident Fund-like passbooks. What's on offer The minimum amount you can invest in them is Rs100 and there is no upper limit. Under this scheme, all deposits up to Rs1.5 lakh qualify for deduction under section 80C of the Income-tax Act, 1961. The interest earned is taxable. You can invest in multiples of Rs 100. These certificates can be owned individually, jointly and also on behalf of minors. The interest rates for all small savings schemes are released on a quarterly basis. The effective rate for NSC from 1 October to 31 December is 8%. The interest is calculated on an annual compounding basis and is given along w...

Different types of Mutual Funds

You may not be comfortable investing in the stock market. It might not seem like your cup of tea. But you can start by investing in Mutual Funds. Many first-time investors invest in Mutual Funds. This is because they do not know how to invest in individual securities. Basic information on Mutual Funds People invest their money in stocks, bonds, and other securities through Mutual Funds. Each Fund has different schemes with specific objectives. Professional Fund Managers look after these schemes. Your Fund Manager could help you invest in a scheme that suits your financial goal. Functioning of Mutual Funds You could make money through Mutual Funds in different ways. A single Mutual Fund could hold many different stocks, bonds, and debentures. This minimizes the risk by spreading out your investment. You could earn dividends from stocks and interest from bonds. You could also earn capital by selling securities when their price increases. Usually, you could choose to sell your share any t...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now