Retirement plans are illiquid investment vehicles and once you buy one it is quite costly to make an exit. A retirement plan is a long-term contract and if you exit prematurely you will only get the Surrender Value and it depends on the type of plan you choose to invest in.
Hence, before buying a Pension plan you need to be right the first time. Here are some points that you should confirm before buying the best pension plan for yourself.
1. How much retirement income is enough for me?
Even before you choose a retirement plan for yourself, you need to confirm how much retirement income you would need. This would largely depend on the type of lifestyle you are looking to have in your retirement and how Inflation is going to kill the value of money over time.
2. Are you choosing the right tenure for your plan?
Before you buy a pension plan, you need to ponder over a few points and one of this is your potential retirement age. If you think you would retire at the age of 60 and you are currently 30 years old make sure that you buy a plan that has a 30 years tenure.
Buying a pension plan with a lower tenure would mean that you would start receiving your pension earlier than you would need. This means that your money gets a lesser time frame to grow than it can otherwise be invested for.
3. Does the plan provide me with tax benefits?
The Premium that you pay towards a pension plan is exempt from tax under section 80C. However, the section 80C allows an individual to Claim tax exemption on a maximum amount of INR 1 lakh.
If you are already utilizing your section 80 C limit because of other investments/expenses, your incremental investment in the retirement plan would not qualify for the exemption. This can severely dent the returns you can expect to earn by investing in a retirement plan.
4. Which type of pension plan is best for me?
There are broadly two types of the pension plan for you to consider â€“ Endowment Plan and Unit Linked Pension Plan (ULPP). Endowment plans are conservative and invest 100 percent of retirement funds into debt instruments like government securities. Hence the return that you can expect is mid to high single digit.
On the other hand, a ULPP can invest in equities or debt or a mix of both. The choice is yours and you need to decide the right mix in accordance to your Risk appetite.
Besides as time progresses if you think your risk appetite has changed, you can even change the mix accordingly. Thus, ULPP is meant for an active investor looking for an attractive return on his retirement portfolio.
5. Is there a better alternative for planning my retirement than a pension plan?
This question should actually be answered even before you answer the other questions. There are alternative ways to build a retirement portfolio and if you think the other options suit you more than a pension plan you may decide otherwise.
You can think of investing in real estate, mutual fund or into equities on your own rather than buying a pension plan.