1. There's an accumulation period
From the time you purchase your pension plan until the time you retire is known as the accumulation phase. During this accumulation period, the premiums that you pay your policy provider will be invested in certain avenues. You can get some tax deductions on your premiums under Sections 80C and 80CCC of the Income Tax Act.
2. You have to purchase an annuity plan
On your retirement, you will be able to withdraw only 1/3rd of the money that has been accumulated as part of your plan. You will have to invest the balance amount in an annuity plan. Based on the interest rates of the plan you choose, you will be provided with a monthly pension from the plan.
3. The plans don't offer any flexibility
Once you choose a particular plan, you have to stick with it for a few decades. Unfortunately, this makes it difficult for you to change your investment plan halfway through or liquidate your assets in an emergency.
4. Insurance providers offer pension plans
Ever since private companies have entered the insurance market, they have started offering Unit Linked Pension Plans or ULPPs. These plans offer investors the opportunity to gain more returns on their savings, as they get to choose where their money is invested, and whether they'd like a mix of equity and debt instruments in their portfolio. These plans offer individuals a lot more flexibility than traditional pension opportunities.
5. It builds discipline
One of the best features of these plans is that they promote savings and help people build financial discipline in their life. A non-payment of premiums could prove to be incredibly expensive, and people will always budget for their premiums and other necessary expenditures before planning the rest of their finances.
6. They are not tax exempt
While the premiums you pay towards your pension policy may have certain deductions, the actual pension that you receive on the maturity of the plan is taxable.
7. You can choose to invest instead
If you'd prefer to have your returns tax exempt, you can choose to invest some money in a Public Provident Fund (PPF), or equities and mutual funds instead. Of course, as with all kinds of investments, you would need to weigh out the pros and cons before signing on the dotted line.
8. Pension schemes aren't very diverse
Most pension plans have only a few limited avenues where investments can be made. Due to this, your portfolio is not properly balanced or diversified, and although you will eventually get the pension you require, you may be able to gain higher returns if you diversify your portfolio with different investment opportunities.
9. You could choose Mutual Funds
A few MF companies offer government-approved retirement schemes, offering individuals a chance to diversify their pension portfolio. These plans also allow you tax benefits under Section 80CCC of the Income Tax Act, which are otherwise not offered with regular mutual funds.
10. National Pension Schemes aren't always the best idea
Many individuals prefer choosing an NPS over other pension plans due to the flat charges and low fund management fee. However, these schemes offer very little flexibility as the retirement age is fixed at 60, and you can only withdraw 10% of the accumulated amount every year. These plans also have higher tax brackets.
Every type of pension plan has its own advantages and benefits. However, the one thing that absolutely cannot be denied is the need to secure your future financially. You can check out HDFC Life's retirement plans to find a scheme that suits your needs.
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