Pension Plans

help plan for retirement and offer the security of insurance.

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How Effective are Pension Policies?

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Not all of us would like to think about retirement when we are young and earning. However, retirement is an important phase of one’s life for which we need to be prepared in advance. And, when planned well, retirement can rather be the most interesting and enjoyable phase.

As soon as we talk about retirement planning, Pension plans or retirement plans is what occurs to one’s mind. However, blindly investing in a pension plan is not the right way to go about it. You need to evaluate if pension plans is the most effective way for you or are there better alternatives. This depends on your personal Risk profile and your understanding of alternate investment avenues.

When you should go for a pension plan?

It makes sense to invest in a retirement plan or a pension Policy only if you think the plan is able to manage your money better than you can do in your individual capacity. The minimum return that a pension plan guarantees is miniscule and makes no financial sense.

As per the guidelines of IRDA pension plans are required to just promise positive non-zero returns to investor. Hence most pension plans guarantee only 1 percent return on the investment you make in form of premiums, which is rather frustrating for a serious investor. However, the actual return can be much higher than the committed minimum return and you have to keep your fingers crossed. Hence if you think you do not have the expertise or skills to invest money on your own it is advised that you invest in a retirement plan.

The vesting phase in a retirement plan is quite restrictive

When you reach the retirement age, the retirement plan will start paying you what you call pension. The Term of your plan decides your retirement age. So if you are currently aged 30 and you opt for retirement plan that has a term of 25 years, you will start receiving your pension at the age of 55 irrespective of the age when you actually retire. So even if you intend to retire earlier or later, your pensions will start flowing in only at the age of 55.

Once the term of the retirement plan is over you enter the vesting phase when you start receiving the pension. The pension you earn depends on the fund that the retirement has accumulated over the term of the plan. The pension amount is usually 6-7 percent of the corpus value. If you believe the return offered by the insurance company in form of pensions on your accumulated corpus is less than what you can otherwise fetch from the market you should rather invest on your own. As later on you may have no choice but to accept whatever they pay you.