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Tuesday, January 23, 2018

Pension Plans

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Returns: 7-10% (For past one year) 

The emergence of the NPS has pushed pension plans from insurance companies into oblivion. Unlike the new Ulips where charges have come down significantly, the pension plans from insurance companies continue to have high charges. Interestingly, these pension plans are more lenient than the NPS when it comes to deploying the maturity proceeds. NPS investors have to compulsorily put 40% of the corpus in an annuity. Some pension plans don't have such restrictions, while some others require only 25% to be put in annuities. But on the other hand, only 33% of the corpus is tax free on maturity, compared with 40% in case of the NPS. 

According to a recent RBI report, the population of Indians above 65 years old is expected to grow by 75%. The report also points out that only a small fraction of this age group has saved in private pension plans and a large segment of the total population has not actively taken steps to ensure adequate financial coverage during retirement. 


Insurance companies believe that the tax treatment of annuities and pension income is one of the main reasons why people don't invest in pension plans. There might be several reasons for people not saving for retirement but the taxability of pension plans is certainly one of them 


Right now, if an investor does not buy an annuity on maturity, 66% of the corpus of the pension plan is taxed. Even the pension from the annuity is treated as income and taxed accordingly. Both these tax rules should be relaxed as far as possible in the coming Budget which will give a boost to the entire pension space and encourage Indians to plan for a worry-free retirement 

Smart tip: Rebalance pension plan portfolio periodically to restore original asset allocation, thus reducing risk. 




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