Evaluate your Pension Options befor Investing in them
If you're new here I invite you to see the SiteMap. I'll be delighted if you want to subscribe to my RSS feed or Email alert. Thanks for visiting!
Pension and annuity are generally associated with security and stability in the sunset years.
A stable annuity is definitely desirable in retirement. Who wants money/ cash-flow worries when one would rather sit back and relax? But, are pension plans the best avenue for retirement planning? Probably not, as we shall see here.
Pension plans from insurance companies
Pension plans are generally offered by insurance companies. These may be traditional products or unit-linked insurance plans.
The points to ponder over in such plans are as follows:
• Pension plans from insurance companies have high cost structures, which impacts the corpus growth.
• In traditional pension plans, the insurers have guidelines on where they could invest. This is both good and bad - good because it brings in stability and dependability to the corpus and bad because such avenues generally tend to give low returns.
• At retirement, pension plans tend to distribute about 5.5-7% (as on date) of the corpus as pensions. This again is lower than what a person would be able to earn otherwise. Indeed, this is a double handicap - the corpus tends to grow slowly during accumulation phase and tends to earn lower than market rates in the distribution phase.
• Once the pension starts, the corpus cannot be taken back even if one wants to. At vesting, one could withdraw at the most 33%. So, even if there is some very good avenue for investment, the investor is stuck.
• Pension annuities are treated as income and are thus taxable. All other insurance proceeds, apart from the pension annuities, are treated as tax-free. This is probably one of the most important drawbacks. Like I asked in the beginning, who wants to pay tax in retirement, after having done that all life long?
The important points to note in these plans are as follows:
• While they do not suffer from most of the handicaps that afflict pension plans, the income is not tax-free even in their case. Under the options available, one could either claim long-term capital gains on the amount received at maturity or opt for dividend distribution where the mutual fund (MF) pays the tax (amounting to 14.16%) and the distributed income is tax-free in the investor?s hands. Either way, there?s no wishing away tax entirely.
• Both these pension plans invest up to 40% in equities and the rest in debt securities. It may not be desirable to have such a conservative portfolio, especially if the investor has over 10 years to retirement.
• One would be better served by being more aggressive in the accumulation phase and progressively pare exposure to equities and MFs as he comes closer to the retirement date.
Does one have any other option?
There are all kinds of investment products available. Here?s what one should keep in mind:
• One could use a judicious mix of equity, MF, Public Provident Fund, fixed deposit (FD) and fixed maturity plan (FMP), etc to build the corpus in the growth phase.
• Before retirement, the investments can be deployed in avenues like FDs, senior citizens? scheme, Post Office Monthly Income Scheme, MF investments with a systematic withdrawal option, FMPs in the dividend distribution mode and monthly income plans, etc to get periodic returns.
• Also, rental income could be an avenue in retirement. Even reverse mortgage could be considered in appropriate cases.
• A good advisor could plan a proper portfolio, which takes care of the liquidity requirements, risk containment and reasonable return concerns.
Remember, you can have a comfortable retirement without pension, and still have no tension
The writer is a certified financial planner who runs Ladder 7 Financial Advisories and can be reached atladder7@gmail.com
Recent Comments