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Things to know about pension plans

December 07, 2022

You don’t plan your retirement on the last day at work. You obviously think over it since the beginning of time, and invest in what you feel will suit you best. Mostly, it is a pension plan that one opts for. If you have opted one for your retirement, that’s great. And, if you haven’t yet, then, you could perhaps take a cue from the following ten pointers about pension plans before taking a step.

How does a pension plan work?

The period from when you buy pension plan until you retire is known as the accumulation phase. During this time, you pay premiums that are suitably invested and be eligible for tax benefit under Sections 80C/80CCC. On retirement, you are allowed to withdraw 1/3rd of the accumulated corpus that is tax free. The remaining amount has to be utilised in buying an annuity plan, which becomes a source of your pension every month until you die. You get a pension with interest rate as per the charges applicable during that time and the money is also taxable.

The positives

You don’t need to bother your head much about this plan. What is required of you is an on-time payment of premiums. This makes you spend judiciously.

You cannot avoid annuity plans

While you get 1/3rd of the sum upon retirement, the remaining amount is a compulsory investment that you have to make in an annuity plan. This becomes a hurdle as you cannot withdraw or invest in any other product that perhaps could offer you a better return and help you finish off your important tasks at home -- a marriage, or a new home, or even settling elsewhere. Being a long-term product, pension plans can become too tricky to handle.

Not quite tax free

As you can withdraw only 1/3rd of the amount in a pension plan as tax free, it falls short of the benefits that one gets when withdrawing from a PPF or Equity Fund as you get to withdraw the whole amount as tax-free. Moreover, the monthly pension is taxable so basically what you get in hand, might not be as big as what you imagined it to be.

Lack of flexibility

Since you are stuck with one fund alone for decades, the flexibility goes for a toss. Pension plans are long-term contracts and if you think of exiting unannounced -- that may not be possible at all..

Not a diverse plan either

In shares and mutual funds, you have the scope to diversify your investment but that is restricted when it comes to a pension plan as it does not have as large a portfolio. You end up investing in only one pension plan and thus you have very few plans to depend on. However, if you would have invested the same money in several mutual funds, your portfolio would have been diverse.

Better to have your own investment portfolio

Considering the limitations that come with a pension plan, it is wiser to invest or create own investment portfolio. Moreover, in terms of returns, all the varied plans will have similar returns vis-a-vis pension plans. You have the scope to withdraw the whole amount, invest in suitable places that will offer you monthly income with a corpus that remains as is.

From all the above pointers, it is advisable that you opt for plans that will have both the flexibility and taxation benefits. Pension plans might be easier to adhere to, but come with small bagages that can make you sulk at a time when you least want it. Choose what suits you best from HDFC Life’s Click 2 Retirement Plans.

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