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Home > Business > Special

Pension plans: When, what, how

Sunil Dhawan, Outlook Money | December 02, 2006

Did you know that people with pensions have fewer kids? And that the biggest risk for an average 30-40-year-old Indian, without an inflation-linked guaranteed pension, is that of living too long? If your reaction to a pension is "I will work till I die", or "my children will take care of me after retirement," consider being 80 years old, with failing energy and no income. Pension planning is part of prudent financial planning.

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. 

Flexi-Pension Product: ULPP

Pension plans: What, when, how?




Choice of cover

Zero cover or with life cover

Zero cover


Single or regular



Min. 10 years

For higher pension, look beyond 10 years

Retirement age

Can be increased

Start at lowest age, increase later

Extra investments

Through top-up

Use surplus funds

Tax breaks

U/s 80CCC

Invest as per your pension needs, tax benefit supplementary

Fund options

5-7 choices

Equity or growth option


2-4/unlimited free switches

Use when required

Annuity options

Usually 5 choices

Exercise on retirement

More Specials

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Number of User Comments: 5

Sub: pension plans more information on pension

Hi, The article was ok. It was like other ones written by insurnace companies. Everybody is telling us how to build a corpus. Nobody is ...

Posted by ravi

Sub: Information on how much to invest

It will be more beneficial if some kind of equation or formula is discussed to calculate pension required based on current lifestyle and how much ...

Posted by Dinesh Kumar

Sub: Pension plans: When, what, how

The best thing would be to for Equity MFs better ELSS and use withdrawals during the needy time!

Posted by Nitinn Binhani

Sub: pension plans

i feel it will be more beneficial if you provide us the specific schemes from the different companies and make a comparable graph along with ...

Posted by dushyant

Sub: Good One But.......

The things said about Pension Plans are right, but it's not clearly mentioned who offers Unit Linked Pension Plans (without need for Life Cover) & ...

Posted by Pradeep Vaz



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