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Pension plans: When, what, how
Sunil Dhawan, Outlook Money | December 02, 2006
Some retirement products like PPF allow accumulation and return a corpus. In a pension product, on the other hand, you make regular contributions during your earning years and then get a regular pay-off after a certain number of years.
Insurance companies offer two kinds of pension plans - endowment and unit linked. Endowment plans invest in fixed income products, so the rates of return are very low. Unit-linked plans are better, as they are more flexible (you can stop contributing after 10 years and the fund will keep compounding your corpus till the vesting date) and invest in stock markets (though lower risk options like balanced funds are also on offer), a must for long-term wealth creation.
Though the insurance company may try and bundle a life cover with your pension plan, stay with your term policy and buy a pure pension plan to maximise post-retirement benefits. Choose a plan that offers the maximum projected maturity value since that will be the basis of the regular pension.
The final value depends on costs, fund management and market performance over the years. While the last two are not directly under your control, you can shop around to find the plan with the highest projected maturity value and the lowest costs.
A little-known option is that after retirement, you can ask your company to transfer all the funds to another that gives a higher pension, at no extra cost.
Contributions to these plans get you tax breaks under Section 80CCC, but pension income is taxable. Compare this with the tax-free corpus that a diversified equity fund leaves and these plans look less attractive. But if the discipline that SIPs require is too much for you, stay with these pension products. Re-evaluate your product when the Pension Bill gets through and individual retirement accounts enter the market.
Tax kick: Combined deduction u/s 80CCC and 80C up to Rs 1 lakh from the total income.