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Make an early start with a pension plan

November 12, 2003 13:30 IST

The standard of living in India has been improving steadily over the years.

But with this improvement there has also been some decline in the purchasing power of the rupee.

In other words, price levels have risen and you have to earn that much more to support the same lifestyle going forward.

This development must come as a matter of concern to the salaried class in particular. It means that thesalary levels have to rise in line with the improved standard of living. This problem is even more in families that are dependent on a single breadwinner.

As far as investments are concerned, the declining interest rate has pushed bond yields even lower.

So fixed income instruments (National Saving Certificates, Fixed Deposits, RBI Bonds) that were the prime investment avenue for investors some years ago, no longer command that kind of investor interest.

Even the tax benefits on these instruments have been declining rapidly.

So what does the breadwinner of the family do? One way to get over this problem is to start saving early and for the long term.

This way you can lock your yield at a higher rate and for a longer duration.

For instance, investors who had invested in the RBI Bond about two years ago had a coupon rate of about 9.5-10 per cent. Now its 8 per cent and declining very rapidly. So the early bird does get a higher coupon rate.

Another option would be to invest in a plan that is specifically designed to take care of your old age/post-retired needs. A pension plan is one such product.

Earlier, only government employees had the option of pension. With the opening up of the insurance sector, now even the private sector offers pension plans.

Considering the merits of a pension plan it would be best suited for an individual planning to save for the future and provide for his retirement. Another feature of a pension plan are the tax benefits.

Pension plans are eligible for tax benefit under section 80CCC. Under this section the premium paid to the extent of Rs 10,000 is fully deducted from the taxable income after standard deductions.

1. Tax benefits

Let us see the actual saving through an example. There are two people Mr A and Mr B, both in the tax bracket of 30 per cent.

Premium PaidType Of Policy
Mr ARs.10, 000Pension
Mr BRs.10, 000Endowment

Mr A gets a deduction of Rs 10,000 (u/s 80CCC) from his taxable income, while Mr B gets a deduction of Rs 1,500 (at the rate of 15% u/s 88).

Mr A whose outflow over a span of say 30 years is Rs 300,000 is actually Rs 210,000 taking into account the amount of tax he saves.

2. Flexiblity

This is one of the most important features of a pension product.

Some insurance companies allow you the flexibility to choose your own insurance company to manage your pension plan after the vesting period.

However, a majority of the insurance companies lack this flexibility and the client has to have his pension money managed by the same insurance company and he cannot migrate to another insurer after the vesting period.

3. Medicals

Some people take an endowment plan to provide for retirement. A big negative with an endowment policy is the higher premium vis--vis a pension plan.

Moreover, the endowment plan premium tends to be higher in case the life assured has a health-related problem.

For instance, a 30-year-old person who wants to take an endowment plan (of HDFC Standard Life) for a 30-year tenure for Rs 200,000 sum assured has to pay an annual premium of slightly over Rs 6,000.

For a pension plan, he would have to pay about Rs 5,000.

To avoid the possibility of paying higher premium on your endowment, you may want to look at investing in a pension plan that does not have mandatory medical tests.

Of course, not all pension plans waive off the medical test, but some insurers like HDFC Standard Life do that.

This means that you can take a pension plan at a premium lower than an endowment plan and also avoid the rate-up in case of a health-related problem.

4. Bonuses

Investing in a pension plan by no means deprives you of bonuses that you may be eligible for in case of an endowment.

So you can take a pension plan and avail of attached bonuses just like you would in case of an endowment plan.

To cite an instance, last year, HDFC Standard Life declared 8 per cent bonus on its pension plan (for 30-year tenure), which is also what it declared on its endowment plan for a similar tenure.

So, with a pension plan you tend to draw benefits of a lower premium rate, no medicals, attached bonuses and tax benefits.

You could also enjoy the flexibility of choosing your insurance company to manager your pension after the vesting period is over.

These are just some of the reasons for someone who has got retirement at the top of his mind to consider investing in a pension plan.

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