What are Unit-linked Pension Plans

Pension plans typically did not offer a sum assured in the past. They were investment-oriented as opposed to insurance-oriented and hence did not provide a life cover.

This changed with effect from September 1, 2010 when pension plans were mandated by the IRDA (Insurance Regulatory and Development Authority of India) to provide life / health cover and a minimum guarantee of 4.5%. Unit linked insurance plans have a minimum lock-in of five years and it's no different with unit-linked pension plans.

How unit-linked pension plans work?

Pension ULIPs are different from traditional pension plans in terms of investments. While ULIPs invest in equity markets among other investments, traditional pension plans invest mainly in bond and government securities (gsecs or gilts) markets.

Expectedly returns of traditional pension plans are stable and therefore more suitable for risk adverse investors. Unit-linked pension scheme is ideal for risk-taking investors given the volatility of equities. Having said that, since equities outperform other asset classes like bonds over the long-term, the investor stands a better chance of accumulating a larger corpus over the long-term by investing in a pension ULIP.

In terms of tax benefits however, there is no difference between the two plans. Premiums paid towards the plans are eligible for tax exemption under the broader Section 80C upto a maximum of Rs 1,50,000 annually.

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