Saturday, March 28, 2009


In our quest for securing our life post retirement, we are always on the look out for an investment plan which is just right for us or in other words best pension plan for us. In India, till now the pension sector was not really thrown open to private players and as such the pension was primarily a facility given to employees of the government organizations only. For others the options were PPF, PF etc. However, subsequently mutual fund pension plan was launched and with the opening of insurance sector , pension plans from insurance companies became available to every one.
So, for some one who is planning to invest towards building a retirement corpus , what are the pension plan options available in India today and which one is the most suitable option for him.

1. Debt based saving instruments like PF, PPF etc – For large part of Indian populace, these have been the most popular saving instrument for building ones retirement corpus. Provident Fund is the mandatory deduction done by the company from the employee’s salary while an equal amount of money is also pitched in by the employer on the employee’s behalf in his PF fund. The Public Provident Fund is a voluntary scheme open to all , where an individual can save for his retirement or other long term needs . PPF is managed by nationalized banks like SBI.
Benefits of PF
- It offers fixed compounded rate of returns on ones investment (currently @8.5%)
- Capital protection i.e. no chance of capital erosion.
- Pension on retirement, death or disability.
- Lump sum insurance payout in case of death of the member, to his nominee/family
- Total maturity amount is tax free.
Benefits of PPF
- It too offers a fix rate of compounded return (@ 8%) to its investors.
- Capital protection
- Maturity amount tax free on withdrawal.
- Withdrawal facility available after 7th financial year of an amount not exceeding 50% of the balance to his credit at the end of the fourth year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is lower.
Who does it work best for?
Since it is primarily a fund where money is invested in debt instruments , it is aimed at moderate capital appreciation while protecting the capital invested. It is best for risk averse investors. For people who have started late in retirement planning should ideally look at these options. Since PF is a mandatory deduction it is a part of everyone’s investment towards retirement by default.
Where does this let you down?
It lets you down on the issue of capital appreciation and wealth creation over long period of time as compared to other plans which also have an option to invest a part of the corpus in equities.

2.Pension Plans from Insurance Companies- Almost every insurance company in India does have its own pension plan. Here they offer investors to choose between equity , debt or balanced fund options. The insurance company in turn invests this money in the markets, bonds, debt etc.The investor invests in these funds and gets the pension after vesting age i.e. the age at which annuity payment starts (normally 55 years) based on the fund value (NAV * units)of his investment as on that day.They also have insurance component with the pension plan . ICICI PRU offers optional insurance with its Life Time pension plan. If the investor does not intend to buy insurance cover with his pension plan, he can opt for “0” death benefit.
Benefits of Pension Plan from Insurance companies
- Offers you the option to have equity exposure.
- Better scope of capital appreciation than PF, PFF etc.

Who does it work best for?
It doesn’t work for anyone. Reason? Its abnormally high charges. The insurance company deducts charges to the tune of 30-50% of the first few years premium in the name of admin charge, fund management charge etc . These charges reduce the actual money invested by the investor and hence lowers the fund value at the end.

Where does this let you down?
It lets you down by cutting you dry with its high cost structure.

3. Pension plans from Mutual Funds - Though Indian investors are aware of the pension schemes offered by insurance schemes, the pension schemes operated by mutual funds are less known.

However, currently, there are only two schemes that were launched in the 90s. Since then, there haven't been any pension plans launched by mutual funds.

1. UTI-Retirement Benefit Pension Fund (UTI-RBP) by UTI Mutual Fund launched in 1994

2. Templeton India Pension Plan by Franklin Templeton Investments; launched in 1997.
The fund managed by these pension plans is not a small amount with the two schemes managing Rs 600 crore.
Investors can start to invest a minimum of Rs 500 monthly. A unit holder of the scheme has to ensure that he invests an aggregate sum of at least Rs 10,000 before he completes 52 years of age for UTI-RBP, while investors have to make a minimum investment of Rs 10,000 by the time they reach the age of 58 for Templeton India Pension Plan.
Benefits of Pension Plan from Mutual Fund Company
- Lower cost structure.
- Higher fund value due to lower charges.
- Specialised fund management expertise at lower charges.
- Allows Equity exposure .

Who does it work best for?
It works best for people who are young and have time at their hand. Since equities as an asset class do require longer time period to beat all other asset classes in terms of returns generated, it is most suitable for younger people having 15-20 year time frame.

Where does this let you down?
It charges about 2.25% of the invested amount as fund management charges which is mighty low than the charges on pension plans from insurance companies , but, is higher than the one proposed in New Pension plan.

4. New Pension Plan – Govt Of India has opened up the pension sector for all the citizens of this country by allowing New Pension plan. This was supposed to be launched from 1st April 2009, but, has been postponed due to coming general elections and its code of conduct being in force. This is plan which will work on the lines of pension plans from mutual fund companies. Here also there will be specialized fund managers managing the investments for people. But, the clincher for this plan is its rock bottom charges at 0.0009% of the total investment. This when compared to 2.25% charged by mutual fund companies seems nothing. This difference in charges will give huge kicker on the final fund value or maturity amount in this fund. It will offer 3 types of funds namely – equity, debt and default option. For people wanting to go for capital appreciation, equity fund will do , for conservative people debt fund will work and default option will give you the best of both worlds depending on your age. Under default option, the debt portion will go up with increase in age to protect capital.

Who does it work best for?
It will work for everyone because of its hugely favorable cost structure.
Where does it let you down?
The tax benefit on withdrawal is not there as of now , which is a disadvantage. But, hopefully sicnce all other pension plans have that benefit, this too might get it when launched.

The verdict is to go for New Pension Plan as soon as its launched. Also continue with your mandatory PF deductions to ensure that your overall portfolio is well represented by equity and debt and is balanced.

Stay wise n stay wealthy….

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