Pension Plan Comparison

 

Every working individual has to think about his/her future when they can no longer earn a living. A pension plan provides a steady income after retirement, allowing you to pay for both your needs and wants. 

With the availability of many options, a detailed pension plan comparison is important if you want a plan that suits your retirement goals. Whether you want risk protection, tax efficiency or higher returns, different pension plans offer different features. 

In this blog, we have presented the pension plans available in India along with their eligibility criteria, tax benefits¹, etc. Read to learn more.

What is a Pension Plan?

Before going to the pension plan comparison, let's start with the basics of a pension plan. A pension plan is a retirement savings and investment plans that provides regular payments after your retirement. These plans are generally sponsored by employers and governments and present a source of income after your retirement.

However, different insurance companies in India offer their pension plans for you. These types of financial products give you both the benefits of insurance and investment in a single place. The investment allows you to grow your fund better, and the insurance helps cover your family in case any uncertainties occur in the future. 

Types of Pension Plans in India

Though there are many pension plans available in India, there are broadly 3 types of pension plans, including: 

Pension Plans

These are investment sum insurance products (annuity plans) that provide a fixed income after your retirement. They accumulate a large sum of money through premiums paid till retirement, after which they pay regular income. 

• Eligibility:  Anyone can choose from any of the pension schemes. The regulatory has  set different eligibility rules for different pension plans in terms of age. Pension plans are generally available to those under the age of 60.

• Utilisation of Contributions: The employer makes contributions to a pension fund (as prescribed by the government and insurance regulator IRDAI). These plans provide a guaranteed² monthly income to eligible retired employees.

• Tax Benefit: The contributions in retirement and pension plans are tax deductible under Section 80CCC of the Income Tax Act, 1961, with a maximum limit of up to Rs. 1.5 lakh in a financial year.

National Pension Scheme (NPS)

NPS is a Government of India-sponsored voluntary pension scheme. It is a market-linked investment scheme that provides a lump sum after retirement as well as a regular monthly income. It also provides special tax benefits¹. 

Eligibility: NPS is open to all Indian citizens between 18-60 years of age, including self-employed individuals. The initial minimum investment is Rs. 500 per annum and after that, it becomes Rs. 1000 per annum.

Utilisation of Contributions: There are 4 types of schemes under NPS schemes where the funds are used in different ways:

i. Default Scheme: Your contributions will be invested in default schemes of 3 different PSU pension funds based on a predefined proportion.

ii. Scheme G: Your 100% contribution will be invested in Government Bonds and related financial instruments.

iii. Scheme LC 25: A Life cycle fund where you can opt for 25% (maximum) equity investment of your total contributions.

iv. Scheme LC 50: A Life cycle fund where you can opt for 50% (maximum) equity investment of your total contributions.

Tax Benefit: Contributions to Tier I NPS accounts are eligible for tax benefits¹ under Section 80CCD(1) of the Income Tax Act, 1961, up to a total of Rs. 1,50,000/year. Section 80CCD (1B) allows for an additional deduction of Rs. 50,000/year for Tier I NPS account contributions. These deductions are available for contributions to pension schemes notified by the government and subject to conditions mentioned in the Act. 

Unit Linked Pension Plans (ULPPs)

In this policy, the investment risk in investment portfolio is borne by the policyholder

ULIP provide both life insurance coverage and investment benefits. Premiums paid to a ULIP plan are distributed into two parts- the first in a life insurance plan and the second  variety of market-linked funds.  

Eligibility: The age limit of this type of scheme depends on the insurance company and the type of plan you are option for. Generally, the entry age should be below 50 years, however, some companies may also allow 69 years of age. In terms of investment, there may be some minimum investment criteria.

Utilisation of Contributions: In this scheme, the insurer invests the total contribution in the stock market or market-linked instruments. This is a high-risk, high-return pension plan where you can enjoy higher returns in the long term.

Tax Benefit: Contributions to ULPPs are eligible for tax deductions under Section 80C of the Income Tax Act¹, and the pension income is also tax-exempt.

Note:

The premium paid in linked insurance policies or the annuity offered under the annuity policies with variable annuity pay-out option are subject to investment risks associated with capital markets and publicly available index. The annuity amount and NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market/publicly available index and the insured is responsible for his/her decisions

Unit Linked Insurance Products do not offer any liquidity during the first five years of the contract. The policyholder will not be able to surrender or withdraw the monies invested in Linked Insurance Products completely or partially till the end of the fifth year

Key Factors in Comparing Pension Plans

Here are the key factors to check among different pension plans to compare them:

• Eligibility: First of all, know the age, employment, and minimum investment requirements to participate in a pension plan. These eligibility requirements are highly important when making a pension plan comparison.

• Utilisation of Contributions: Secondly, the most important thing is how the funds are invested and managed. You should opt for a pension plan based on your risk profile. For example, if you want to take higher risk for better returns, you may choose Unit Linked Pension Plans (ULIPs).

• Tax Benefits: Another important reason for investing in a pension plan is to get tax deductions. Different pension plans allow you to claim tax deductions under different sections of the Income Tax Act¹. You should compare different pension plans based on their tax benefits.

• Survivor Benefits: Death benefit is also important while making a pension plan comparison. In case of any uncertain incidents, it will be highly beneficial to support your family financially. 

How to Choose the Right Pension Plan for You

How the given steps to choose a pension plan based on your needs:

Assessing Your Retirement Goals

When comparing different pension plan options, it is important to consider your retirement goals. Additionally, you should consider factors such as retirement age, lifestyle, and any future goals. This will help you get an idea of how much income you need after retirement. Based on these things, choose the most suitable pension plan.

Considering Your Financial Situation

Your current financial situation also plays a significant role in selecting the right pension plan. Consider your income, expenses, and existing savings to determine how much you can set aside every month. Also, consider your risk and investment preferences, as they help you decide the type of pension plan.

Consulting with a Financial Advisor

If you are confused about how to compare pension plans, you can consult with a financial advisor. They can help you determine your retirement goals, analyse your financial situation, and recommend the most appropriate pension plan. They can provide better advice on investment strategies, tax implications, and other important factors.

You can also check a pension calculator to calculate the expected returns of your investment in pension plans.

With proper determination of your retirement goals, financial situation, and professional advice, you can make an informed decision. By choosing the correct pension plan that best meets your needs helps you achieve your retirement goals easily.

Conclusion

Choosing the right pension plan with a pension plan comparison is a crucial factor in retirement planning. Always consider different factors such as eligibility, utilisation of funds, benefits, pension payout options, survivor benefits, etc., when choosing a pension plan.

Start your retirement planning as soon as possible because early planning and regular investments always work best for pension planning.

FAQs on Pension Plan Comparison

Q. Which pension plan is best?

The best pension plan depends on the particular profile of a person based on eligibility criteria, utilisation of funds, tax benefits, pension payout options, survivor benefits, etc. If you are unable to determine these things, you can seek the help of a professional financial advisor. 

Q. Is a pension plan better than FD?

If you don’t want to take risks, you can choose to invest in FDs. Otherwise, if your goal is higher risk and higher returns, you should invest in NPS which is an equity-linked investment option.

Q. Which pension scheme has the highest return?

NPS is the government pension scheme with the good returns.  This pension is linked with the stock market. As it has a connection with the stock market, it has higher risks but is the best option if you are looking for better returns over time.

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