Pension plans

Aegon Religare’s new aggressive ad campaign about their pension plans have become quite a success. The advertisement itself shows that we need to plan for our retirement as soon as we can. The example of a Rs. 50 bus ticket reminds me of the days when I used to travel by bus with a minimum ticket of 0.25 paise. Today the same is costing Rs. 3. Hence there has been an increase of 13% p.a in bus ticket prices. Every item on your grocery list, real estate, medicines and consumer durables have become expensive and inflation will keep on rising. One has to create a huge corpus to survive post retirement. One of the options is to invest in pension plans. A pension is an income post retirement throughout your life. For creating an income post retirement you have to start saving into a pension scheme, as early as possible and as frequently as possible. It is similar to the Provident fund scheme that every company provides, on which an individual earns an income post retirement throughout his life. Almost all insurance companies in India provide pension plans which have a few distinct features:-

1. One can invest a fixed amount monthly, quarterly, semi-annually or annually.
2. Amount saved in a pension plan is invested at the applicable Net Asset Value (N.A.V) and denoted in units.
3. Every month a certain amount goes towards charges like the fund management charge or premium allocation charge and so on.
4. You can also opt for an insurance cover on your pension policy. The cover provided is generally 5 to 10 times of annual premium.
5. The investor has to choose from a range of sub-options or plans provided by the pension plan. For example a risk averse person can opt for a Protector type fund where 90 to 100 % of the investment is made in Gilts and Treasury bills which are risk free. Similarly an investor with a greater risk appetite can invest in Aggressive fund where 60 to 100% will be invested in equity and equity related instruments.
6. One has to define their retirement or the vesting age when they wish to stop investing and start receiving a regular income. The vesting age can be anywhere between 45 to 75 years as per policy terms.
7. A reversionary bonus is declared annually and a terminal bonus is paid out at the vesting age from the With profits fund. Even this differs from company to company.
8. You can opt for a single premium or regular premium pension plan.
9. In case of death of the investor during the term the company pays out the fund value + bonuses (if applicable) or the Sum Assured (cover) or both. This too differs from policy to policy.
10. At the vesting age the investor can opt for an annuity plan from the same or a different pension provider.
11. Tax benefit u/s 80C upto Rs. 1 lakh p.a. On retirement one take withdraw a lump sum of 33.33% of the fund value tax free as on the vesting date.
12. One can surrender the policy after three years of policy existence and can redeem the fund value as on that date.
13. Pension received post retirement is treated as an annuity and is taxable as income under the head of salaries.

Tax laws keep on changing from time to time. Different pension plans have different features. It is always advisable to read the prospectus. Also one needs to consult a financial planner to ascertain the fund required at the time of retirement and then follow a disciplined investment approach to build this fund.