How to Choose a Pension Plan for Retirement Planning

Here are 10 tips for buying a retirement plan

1. Earlier the better

   Retirement planning must begin early on. How early? Right from the time, you draw your first cheque, set aside some money for a rainy day. Over time as your salary/income increases, hike the contributions.

2. Equities are important

   Studies have proved that over time, equities can add significant value to the portfolio compared to other assets like fixed deposits, bonds, gold and property. So when you are planning for retirement, make sure equities are part of your plan. This could be in the form of unit-linked pension plans or equity funds or stocks.

3. Think diversification

   Equities are good, but so are fixed deposits, bonds and gold. Wait, aren't we contradicting the previous point where we said equities work harder than other assets. True, but that is not to say equities will solve all your problems. You need a portfolio with equities in it along with other assets like fixed deposits and gold. All these assets need to be in a particular weightage or allocation. Together they form a portfolio that can help you achieve post-retirement aspirations.

4. PPF will not be enough

   Many individuals go into retirement planning with an auto pilot mindset. They contribute money towards options like PPF (public provident fund) or EPF (employee's provident fund) and believe they are set to retire in comfort. This is far from the truth, these options are at best one of the avenues we discussed earlier (remember equities, fixed deposits, bonds, gold). There is more to be done in terms of building a portfolio than just PPF. PPF or EPF won't even be enough to fight inflation. Picture this if long-term inflation is at 6% and the PPF rate is 8.5%, that's a mere 2.5% (8.5%-6.0%) net of inflation. Imagine you go into PPF thinking you will make Rs 85 on every Rs 1,000 and you end up making Rs 25 on every Rs 1,000 because inflation stole the rest of the money from you.

5. Vesting age 

   Go for pension plan with a vesting age that matches your needs. There are some pension plans with vesting age starting at 40 years. So if you want an income stream that early on in life, go for such a plan. On the other hand, there are plans with vesting age at 85 years, which is suitable if you plan to retire late.

6. Higher sum assured

   Go for a pension plan that gives out higher of sum assured on vesting and accrued bonuses or assured benefit.

7. Assured death benefit

   Prefer a plan with a minimum payment on death for e.g. 100% of reimbursement of premiums.

8. A suitable annuity option

   Opt for a pension plan with the annuity options most suited to you for e.g. the lifetime option guarantees annuity for a certain number of years regardless of whether policyholder survives or not, the joint life/last survivor annuity gives out pension till the individual is alive, post which his spouse receives the pension.

9. Expenses

   Go for options where charges / expenses are competitive. Remember the more money you lose towards expenses, the less you save towards retirement. This calls for a comparison of expenses across options to identify the most cost-effective one.

10. Financial planner

    Retirement planning is serious business. It is serious enough for you to commit money towards it. And it is serious enough for you to consider engaging an experienced and competent financial planner who can handhold you through the retirement planning and execution process.

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• Compare Retirement and Pension Plans
• Ways To Plan Retirement in India - Step by Step Guide
• How to Plan for Retirement as Per your Age

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