When we talk about retirement different sentiments arise in our minds. Some of us feel tensed about meeting the post retirement related expenses while some of us feel that retirement would set us free from the daily humdrum of working life. Retirement holds more significance for salaried individuals rather than self-employed ones because for them, it is a certain age beyond which they cannot pursue gainful employment. Though self-employed individuals too cannot ignore the looming retirement, they have a more flexible timeline when it comes to actually being retired. No matter the age at which one seeks or gets retirement, the primary concern among all retirees is the financial implication which comes with the said retirement.
Whatever sentiment retirement arouses in you, you cannot ignore the looming financial dilemma which is inevitably associated with retirement. Lack of regular income juxtaposed with high lifestyle and medical expenses makes retirement gruesome and financially challenging. Perhaps this is why all of us resort to retirement planning and financial advisors put so much importance of a retirement corpus.
In today's age when we have learnt from the mistakes of our grandparents of not having a retirement corpus, we have become more vigilant and aware of planning for our retirement. When we seek retirement planning, there are a plethora of investment products which demand our attention and we, as investors, get lost in the melee of such financial products.
A life insurance plan also comes to our rescue in planning for retirement though it is often ignored. Here, let us consider two such life insurance products which help in building up a retirement fund through their investment features – ULIPs and Pension Plans
What is a pension plan?
A pension plan is a plan designed specifically for retirement planning purpose. These plans are called the reverse of life insurance as they provide annuity payouts till the death of the policyholder. Let us understand the plan in details:
Types– there are two types of pension plans. One is the Immediate Annuity Plan wherein upon payment of a lump sum amount, called the Purchase Price, the insurer promises to pay annuity instalments from the next chosen frequency. There are multiple options of receiving such annuity payouts and joint life payouts are also available which pay annuity till the spouse’s lifetime too.
The other type is a Deferred Annuity Plan wherein normal premiums are payable for the plan tenure which accumulate into a corpus. On maturity, the corpus should be used to purchase an Immediate Annuity Plan or be invested into another Deferred Annuity Plan.
Life cover– Immediate Annuity Plans do not provide life cover. The annuity payments stop when the annuitant, or his spouse, if joint life annuity option is selected, dies. There is a life cover in Deferred Annuity Plans which pay a pre-defined death benefit if the insured dies during the plan tenure.
What are ULIPs?
A unit linked insurance plan, or ULIP in short, is a market linked plan. The premiums are invested in a fund of the policyholder’s choice. The funds invest the money in the capital market and earn market linked returns. These plans provide many flexible features like partial withdrawals wherein money can be withdrawn from the plan, switching option which allows switching between funds, top-ups which allow additional premiums to be invested in the plan among others. The plan pays a maturity benefit and also a death benefit as life insurance cover is provided with the plan.
ULIP or Pension Plan – which one is the better alternative for retirement planning
Both types of life insurance plans – ULIPs and Pension plans, can be chosen if you are looking to create a retirement corpus. Both have their merits and demerits over one another and before you make a choice such facets demand your consideration. So here we go:
ULIPs over Pension Plans
ULIPs are the hottest-selling insurance plans and it is no surprise if investors favor a unit linked plan over pension plans which are retirement-specific plans. Here are the comparative advantages where a unit linked plan scores over pension plans –
The tax angle– yes, the primary area of concern is the tax implication of both the plans where a unit linked plan scores the winning points. ULIPs have the same tax provisions which are enjoyed by other plans of insurance. The premiums you pay under the plan would be getting tax benefit Under Section 80C of the Income Tax Act 1961 and the benefits received, whether maturity or death benefit, would be tax-free under Section 10(10D).
Pension plans have a different tax treatment. The premiums paid towards the plans are exempt under Section 80CCC. The corpus accumulated and the resultant annuity payouts are taxable under Section 10(10A). The policyholder can commute (withdraw) 1/3rd of the accumulated corpus as cash and this commuted part is tax-free. But, sadly, the annuity instalments which are paid out of the remaining 2/3rd part of the corpus are taxable in the hands on the annuitant. So, ULIPs are better in terms of their tax-implications than pension plans.
Flexibility– unit linked plans provide a whole lot of flexible options and it is no wonder that Deferred Annuity Plans come in the unit linked version too. Though such plans provide the flexibility inherent in unit linked plans, the applicable benefit payout structure is still rigid when it comes to unit linked pension plans. In ULIPs, the policyholder is free to receive the maturity benefit and use it the way he/she wants to but pension plans restrict such usage. Though the death benefit in pension plans can be utilized by the nominee in whatever way he deems fit, the maturity benefit has restricted options. The policyholder can withdraw only 1/3rd part of the corpus in cash and the rest of the corpus should be availed as annuity payouts.
Alternatively, the policyholder can use the entire corpus to avail the annuity payouts. The last option is the open market option wherein the policyholder can use the maturity proceeds to buy a Single Premium Deferred Annuity Plan or an Immediate Annuity Plan either from the same insurer or from another insurer. In short, the maturity proceeds of a pension plan cannot be taken entirely in cash or used for any purpose other than availing annuities while in a unit linked plan the entire maturity benefit can be availed in cash and put to any use.
Pension plans over ULIPs
Now it is time to see where Pension Plans score a goal against Unit linked plans and why then can be chosen.
Earmarked investments– though ULIPs provide flexibility when it comes to the usage of benefits, a pension plan provides an earmarked investment option. Since the benefits of a ULIP plan can be used in any which way, you as a policyholder, get tempted to draw upon such benefits whenever you face a financial crunch which depletes your retirement corpus. Pension plans, on the other hand, provide benefits only to be used forreceiving annuity which earmark the benefits to serve only as retirement funding. Though rigid, this is also beneficial if we look upon the dedicated purpose of a pension plan which is retirement funding.
Steady source of income– pension plans provide annuity payments till our lifetime and if we opt for joint life annuities, our spouse can also enjoy such annuity payouts even in our absence. Thus, these plans provide a steady source of income in retirement where other sources of income might dry us. ULIPs on the contrary provide a lump sum benefit which might be used on other avenues and might not last our lifetime.
Flexible retirement funding– pension plans come in ULIP variants too and the flexible options which a ULIP Plan provides like partial withdrawals, switching, top-ups etc. can also be enjoyed through unit linked pension plans. Thus, you can build up a retirement corpus in a flexible manner by investing in such unit linked pension plans which provide the best of both worlds – a ULIP plan and a pension plan.
What should you do?
The comparative advantages of both the options against each other might have left you confused. But, the solution is simple. It all comes down to your requirement and judgement. But, before you make your choice, knowing the intricacies of both the plans is essential so that you do not end up investing in a wrong product. The next step is analyzing your sense of discipline to your goals. If you are disciplined enough to create a retirement corpus a Unit Linked Plan would help you do so even if the benefits have a universal usage. You can actually benefit from such universal usage feature in a cash crunch when you desperately require financing. On the other hand, if you are prone to investing in fixed return products or keep your money idle in bank account and thus may be depleting your retirement corpus, a pension plan should be your choice as it would create a forced retirement corpus with no possibility of using the corpus on other activities. Do spare a thought about the tax implication though. Since annuity payouts are taxable, ascertain whether your income would qualify for taxation post retirement before choosing a pension plan. If yes, a ULIP would be a better alternative as the benefits are tax-free. So, analyze your situation and make an informed choice.
Insurance is the subject matter of the solicitation.