Pension and insurance are two sides of the same coin. While pension plans can help you lead a comfortable life post-retirement, life insurance plans help you secure your family’s future against life’s uncertainties.
The financial market offers you many options to plan for your retirement with various types of pension plans as well as life insurance plans. Some pension plans combine the features of insurance as well.
There are various types of pension plans available in the market today that cater to each person’s unique needs.The 3 main types are:
- National Pension Scheme (NPS)
- Traditional Pension Plan
- Unit Linked Pension Plans
Comparing and evaluating these broad plans would help you opt for the right plan that can effectively meet your financial goals.
The comparison can be done on various facets of the three different options and they include the following:
1. National Pension Scheme (NPS)
NPS is a pension program implemented by the Government of India under the purview of Pension Fund Regulatory and Development Authority (PFRDA).
Applicability: NPS applies to any Indian citizen between the age of 18 and 60 years, capable of investing 500 initially in the NPS Tier I account and subsequently 1000 every year thereafter till the age of 601.
Use of contribution: The NPS administration would use the contribution of Tier I and Tier II to invest in any of the following 4 schemes:
- Default Scheme: Investments would be done in default schemes of 3 different PSU pension funds in a predefined proportion
- Scheme G: 100% of the contribution will be invested in Government Bonds and related instruments
- Scheme LC 25: A Life cycle fund where the Cap to Equity investments is 25% of the total asset
- Scheme LC 50: A Life cycle fund where the Cap to Equity investments is 50% of the total asset
The subscriber can opt for any one of the above-mentioned schemes2.
Benefits: The benefits of NPS are as follows:
- 60% of contribution plus interest earned in Tier I account can be taken as a lump sum at the age of 60
- 40% of the contribution would be used for providing the member with annuity
- The member can plan for his annuity amount and make contributions to fulfil the desired annuity3
- The Tier II account can be used anytime to withdraw any amount standing in the credit of that account
- Amounts from Tier II accounts can also be deposited in Tier I account4
Tax# benefits: Contributions to Tier I accounts qualify for tax# benefits under 80CCD(1)* up to a combined total of ₹1,50,000 clubbed with other investments. Additionally, another 50,000 of the contribution to Tier I account is exclusively allowed as a deduction under Section 80CCD (1B) over and above what is allowed under section 80CCD(1).
Who can benefit: Anyone under the age of 60 can opt for NPS. This is useful for people who want to secure both a lump sum amount at age 60 and a pension thereafter during their post-retirement.
2. Traditional Pension Plans
Traditional pension plans come with several features which include a simple pension plan, a simple pension plan with life cover, a pension plan with immediate annuity and a pension plan with deferred annuity. The features are as follows:
- The regular pension plan invests all the money that you set aside and you get a corpus at the end of the term including interest earned. In this plan, if you do not survive the policy term, your nominee would receive the corpus along with interest earned till the time of your demise
- The regular pension plan with life cover takes out a portion of the money set aside by you to pay a premium for covering your life through a term policy with a sum assured. Typically, the premium is low for a term insurance. Thus, in this plan, your nominee would receive the sum assured in case of your demise before the end of the policy term along with the sum accumulated from the start of the policy till the time of demise
- The regular pension plan with immediate annuity payments allows the policyholder to start earning an income from the month following the month of investment
- The regular pension plan with deferred annuity payments allows the policyholder to accumulate a corpus by paying premiums during a policy term. At the end of the term, the premiums paid and interest earned becomes a sizeable corpus allowing you to buy an annuity and earn a regular pension. Typically, pension plans with deferred annuity payments come with life insurance cover
Applicability: Anyone can opt for any of the pension plans subject to applicable laws as prescribed by IRDAI. Each plan has age limits as per the norms laid down by IRDAI. Generally, pension plans are applicable below the age of 60 except in the case of pension plan with immediate annuity where people above 60 can also participate.
Use of contribution: The insurer would invest the premiums collected from the pension plan subscribers in accordance with the prescribed regulations set by the regulators and the Government of India.
Benefits: Each plan has specific benefits. Some of the plans will have life cover and some will not. Some plans do offer immediate annuity while other plans offer a deferred annuity. There are several options available in each plan to meet any kind of requirement of the subscribers.
Tax# benefits: Investments in pension plans qualify for tax# benefits under 80CCC up to a combined total of ₹1,50,000 clubbed with other investments. Typically, annuities are taxable as income from other sources.
Who can benefit: Anyone who is interested in securing a pension post-retirement.
3. Unit Linked Pension Plans
While traditional pension plans invest the premiums received from subscribers in safe investments such as government and debt securities the unit-linked plans invest a substantial portion of the premiums in high return-high risk investments such as non-government securities, bonds and stocks.
Applicability: Age limit for unit-linked plans are different based on the type of plan opted for and the company that offers the plan. While some companies limit the upper age limit to 50 others can go up to 69. Some of the plans have a minimum contribution condition.
Use of contribution: Insurers use the premiums to invest in the stock market and therefore expect high returns. Sometimes, they tend to invest the entire premium collected in equity instruments. This is obviously a high-risk, high return scenario given the fact that longer the investment horizon, higher the returns.
Benefits*: There is no guaranteed benefit. If the market as a whole does well, then the plan performs well and the subscribers benefit. Typically, unit-linked plans also offer insurance cover.
Tax# benefits: Investments in unit-linked pension plans qualify for tax# benefits under 80C up to a combined total of ₹1, 50,000 clubbed with other investments.
Who can benefit^: Aggressive investors with a high-risk appetite can benefit from unit-linked plans.
These are by and large the three types of pension plans available to investors in India. They are fairly detail-oriented and subscribers should study each of the plans carefully and choose the ones that are suitable to their financial profile@.
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# Tax benefits under the policy are subject to conditions and other provisions of the Income Tax Act, 1961. Goods and Services Tax and Cesses, if any, will be charged extra as per prevailing rates. Tax laws are subject to amendments made thereto from time to time. Please consult your tax advisor for details, before acting on above.
*Unit linked insurance products are subject to market risk, which affect the Net Asset Values & the customer shall be responsible for his/her decision. The names of the Company, Product names or fund options do not indicate their quality or future guidance on returns. Funds do not offer guaranteed or assured returns.
@For more details on the risk factors, terms & conditions please read the sales brochure of the plans carefully before concluding the sale.
^In ULIPs, the investment risk in the investment portfolio is borne by the policyholder.
1http://www.npstrust.org.in/sites/default/files/FAQ_eNPS.pdf (Point 12)
1http://www.npstrust.org.in/content/eligibility (‘All citizen model’)
2https://npscra.nsdl.co.in/scheme-preferences.php (Point 3. ‘What are the Investment Options available for Subscriber under Tier I?’)