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Among a myriad of financial goals that a person has, retirement perhaps is the most important and long term in nature. No wonder, insurance companies come up with advertisements that harp on how pension plans help create a good retirement kitty. But, even if you start early, pension plans may not give the best returns. Say, you are 35 years old with a monthly expenditure of Rs 25,000 and you wish to maintain the same lifestyle after retirement, you would need Rs 270,000 (with inflation of 10 per cent a year). The retirement corpus required: A whopping Rs 18.5 crore (Rs 185 million).
So, how do pension plans work? For Rs 100,000 premium for 20 years, HDFC Life Insurance’s Pension Super Plus will pay a guaranteed maturity benefit of either 101 per cent of the premium paid or Rs 20 lakh (Rs 2 million) of the fund value.
Similarly, ICICI Prudential Life Insurance’s Shubh Retirement promises a guaranteed maturity benefit of 101-195 per cent, depending on the investment option, policy term and premium payment term and Birla SunLife Insurance’s Empower Pension Plan promises 101-140 per cent of premiums paid.
“Who can do that?” asks an investment advisor. A combination of products can help achieve long-term requirements. “Then why not choose a pure equity product costing much lesser. It can help achieve better results than a pension plan and that is proven. One can buy multiple equity funds to fulfill his goal but can’t afford multiple pension plans,” he further added.
When equity-based policies cannot help you fulfill your requirement, traditional pension plans certainly cannot. For a requirement of Rs 270,000, you will first need to invest more than what you invest in unit-linked plans to get a decent maturity amount. Then, there are costs as well. “Unit-linked pension products have not given more than seven per cent till now. And traditional ones return around 5.5 to six per cent a year,” said the broker. Also, the cost is higher for pension plans. For example: There could be 2.5 per cent for premium allocation, 1.35 per cent a year for fund management, 0.4 per cent of premium for policy administration, 0.4 per cent of fund’s value for investment guarantee and Rs 250 as miscellaneous charges.
Despite this, the income you will earn will be constant even though your needs will only rise, assuming you will live till the age of 85 years, says certified financial planner Pankaj Mathpal. He feels the New Pension Scheme (NPS) is better than pension policies but only in the accumulation phase where it allows the flexibility of changing premiums every year. And its returns have been better than pension policies at an average of nine per cent.
Though here too, the problem of a fixed income post-retirement remains along with a balanced fund approach. NPS levies a minimal charge of less than one per cent towards fund management. Then, there are the Employees’ Provident Fund and Public Provident Fund that give consistent returns. Retirement funds from mutual funds at 2.5 per cent of expense ratio could be better placed. These allow investing through systematic route also. But these mostly invest a substantial part in debt. Invest in EPF, PPF or NPS and use equities for higher returns.
Photograph: Reuters
