Pension plans in India: Are they really attractive?

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Pension plans in India: Are they really attractive?
Virtually, every insurance company including the Life Insurance Corporation has a pension plan in place to offer you returns after you retire.

The promise can be for a large sum of money after a fixed period of years, say for example 18-20 years. Now, in a deferred annuity plan you would be promised say Rs 1 lakh per month, 20 years from now if you invest a sum of money say X per year. Remember, the value of Rs 1 lakh, 20 years down the line could well be considered as negligible.

Poor returns from deferred Annuity Plans

Pension plans offer returns that ultimately are not attractive. Over the next 15-20-years gold, real estate and equities are capable of offering you far superior returns, if their track record is any indication. Some estimates vary, but returns could be as poor as 6-7 per cent from pension plans.

Is the returns enough?

With consumer price inflation at near 10 per cent levels, one wonders how you would beat inflation with such poor returns of 6-7 per cent. Most pension plans offer assured returns, which means they are likely to park your money in safe instruments, which give very low yields.

High charges

Investors should note that annuity plans, like unit linked insurance plans attract high allocation charges. If you ask me who is going to pay for these changes? The obvious answer is - you. So, many companies may talk of the past track record of 7 per cent, but you must remember to minus the charges.

Not convenient

You can only withdraw a part of the money, which will be tax free. If you already have fresh resources available for your retirement, you would get stuck with a pension plan unnecessarily. Also, the pension paid after the term is taxable.

There are various other avenues, which offer a superior return. Say for example, if you need to invest to create a corpus in the next 15 years, some of the debt dedicated mutual funds are ideal. They have some exposure to equity, which will generate superior returns when compared to annuity plans.

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