Creating a retirement corpus is always confusing as there are a lot of instruments through which one can create it. And then, there are a plethora of pension scheme advertisements that lure investors with their emotive themes. Some show grandchildren’s needs being addressed by the retired, while others harp on the theme of a great post-retirement life. The constant reminder is investing in these schemes would allow benefits under Section 80C of Income Tax Act.
However, things aren’t that straight forward. There is an expense attached with pension plans that most financial experts don’t like. Typically, pension plans are of two types — traditional and unit-linked insurance plans. Two mutual fund houses offer this product as well – UTI’s Retirement Benefit Pension Plan and Franklin Templeton’s India Pension Plan.
While mutual funds charge an annual fund management fee, insurance companies charge premium allocation charge (PAC) and administrative cost, among other charges.
While UTI charges 1.75 per cent as annual fund management fee, Franklin Templeton demands 2.14 per cent. In addition, while the exit load for UTI is 3 per cent (withdrawal before the insured attains the age of 58), Franklin Templeton charges 5 per cent on withdrawal before one year, 3 per cent after one year and 1 per cent after three years.
Unit-linked pension plans are more expensive. For instance, ICICI Prudential’s Pru Assure Pension charges 100 per cent of the premium as premium allocation charge (PAC) in the first year. However, there is no PAC charged in the coming years. Additionally, there is a fund management fee of 0.75-1.35 per cent every year, depending on the fund.
Aviva’s New Pension Plus RP charges 25 per cent as PAC in the first year and 2 per cent each in the second, third and fourth year. The administrative charge is Rs 48 per month and fund management charge varies between 1-1.35 per cent.
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HDFC Pension Super’s annual PAC stands at 15 per cent for the first four years and fund management fee is Rs 50 a year.
So, there is a cost disadvantage for investors if they choose pension plans.
After retirement of the investor, one third of the corpus accumulated through the pension plan can be commuted tax free. The rest of the amount will be put in any annuity scheme of the existing or any other insurer. The annuity that is received from this corpus will be taxed, if the total amount from annuity and other sources is more than Rs 220,000 a year. On the other hand, if one invests in a mutual fund, the accumulated amount is tax free because of zero long-term capital gain tax on equities.
No wonder, experts advise investing in an equity diversified fund via systematic investment plan (SIP) route. “Allocate money to a mix of instruments and build a better portfolio, earn better returns,” said Krishna Chokhani, a financial planner.
Experts advise investors to shift the money to a monthly income plan or a debt fund as he approaches retirement. Other investment avenues could be real estate, depending on the rent earning ability of the area.
According to experts, the New Pension Scheme (NPS) could be a good option because of low cost. “With an annual fund management charge of 0.01 per cent and a transaction cost of Rs 6, NPS can be a strong contender to pension plans,” says Balakrishnan V, a financial planner.
For a yearly investment of Rs 25,000, NPS will charge Rs 2.50 as fund management fee and Rs 6 as transaction fee, a total of Rs 8.5. However, the limitation with NPS is that fund houses can mostly invest in debt instrument, thereby limiting their ability to beat inflation over a long period.
