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

Group Health Insurance

Buy Group Health Insurance Online   For Human Resources, the biggest challenge today is to decide whether medical benefits should be offered to employees or not, what type of plans should be offered, what will be the cost and how will the cost be split between employees and employer. Well, most of these are subjective and would depend on a lot of factors including company size, average employee salary, etc. However, this article will give you a fair idea on how you should go about deciding these factors: 1. Why offer group health insurance benefit to employees : Studies have proved that retention rates among employers offering GHI are much higher than the ones who are not offering. Moreover, the cost of providing this benefit as a percentage of salary is very low as compared to the perceived value. As an example, say if average salary of an employee in your organization is 4 LPA. If you decide to offer a health insurance benefit to him for a Sum insured of ...
Read more

ICICI Prudential Dynamic Plan Invest Online

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   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...
Read more

Commercial Paper (CP)

Invest Mutual Funds Online Download Mutual Fund Application Forms Commercial Paper (CP): These are issued by corporate entities in denominations of Rs.2.5mn and usually have a maturity of 90 days. CPs can also be issued for maturity periods of 180 and one year but the most active market is for 90 day CPs.   Two key regulations govern the issuance of CPs-firstly, CPs have to be compulsorily rated by a recognized credit rating agency and only those companies can issue CPs which have a short term rating of at least P1. Secondly, funds raised through CPs do not represent fresh borrowings for the corporate issuer but merely substitute a part of the banking limits available to it. Hence, a company issues CPs almost always to save on interest costs ie it will issue CPs only when the environment is such that CP issuance will be at rates lower than the rate at which it borrows money from its banking consortium. ----------------------...
Read more

Lump Sum or SIP?

Invest Mutual Fund Online     You have a lump sum in hand and you wish to invest in equity funds. However, you have heard a lot of talk about investing in equity funds through Systematic Investment Plans (SIPs) because they help average costs, ensure you do not ill-time the market, and help you invest in small sums, besides giving you many other advantages. So, should you invest the money you have in hand in one go, or let it remain in your bank account and then do an SIP? There is no harm in investing a lump sum amount. For all you know, compounding, over the long term, could work better with lump sum. However, make sure you fulfill all of these three criteria if you want to invest in one go. Else, SIP is the way to go. #1: You invest for the long term According to past data, ideally, if you have a time frame of 12 years or more, you can consider lump sum investing (provided you satisfy the other two conditions that follow). So, what is the sanctity behind 12 years? Is it because only...
Read more

Why credit history is critical?

Will you need a loan to buy a car or a house? Do you know why some people get their loans sanctioned quickly without any hassle, whereas others find that their approval is delayed or their application is rejected? If you want a loan, you will need to work to build a solid credit history because this can have a bearing on the ease with which you get loans. Read on to learn more about what is a credit history and how to build a good credit score. What is a credit history? Your credit history is a way of tracking your credit behaviour and habits — basically it shows how disciplined and regular you are when it comes to repaying your dues on loans that you have taken. It will show a complete record of your past borrowing and repayment record including details about any late payments or if you have defaulted on a loan. This track record is readily accessible to lenders and is used by them to when reviewing your loan application. Borrowers who have historically had a bad record of managing...
Read more
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