Article

Earn Your Pension
May 14 , 2013
Unless you are a government employee you would have to custom-create your pension plan. A pension plan should ideally give you decent returns beating inflation rate and on retirement protect your capital and give regular returns. Pension plans (called annuity plans) are available with life insurance companies but these have high charges and have very low yield.

So you had rather made your own pension plan with careful planning. An ideal pension would have the following features:

1. Returns beating inflation during accumulation phase 
During the 20-25 years that you invest for your pension your investment should earn returns that are higher than inflation rate. For such returns investment will have to be exposed to the markets.

2. Low charges 
High charges can eat away into your final pension amount. In annuities from life insurers charges are first deducted from your premiums before they are invested. Mutual funds have lower charges than most annuities. Presently NPS is the cheapest pension product with around 0.5% annual charge.

3. Tax efficiency 
You don't want to pay income tax once your earning period is over. Your pension plan should minimize tax outgo. EPF and PPF score on this point; both have tax exemption on withdrawals.

4. Regular stream of income 
This is of much significance too. You could have crores of rupees in shares but it does not guarantee you would get stable monthly income from your retirement date. As retirement draws near you need to create a plan to move your investments systematically to products that offer security of capital as well as convenient monthly withdrawal options.

What are your options for a good pension plan? Unfortunately there is no single product that combines all the above features well that we could recommend. NPS is an ideal product except on the tax front but since it has been around less than 5 years you'd rather go slow on it.

If you are 10 years or more away from retirement you can accumulate a good chunk of your pension investment in diversified equity funds. These are market linked and are tax efficient. As you move closer to retirement your investments can be focused in MIPs which have 80-20 equity-debt ratio and have a Systematic Withdrawal Plan (SWP) post retirement for monthly income.

And most importantly remember not to touch your pension investments for intermediate requirements.

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