A pension plan is an annuity product which generates income during retirement. At a very high level there are two types of pension plans:
In this article we will focus on pension plans offered by mutual funds.
Pension plans offered by Mutual Funds do not get as much of mention, compared to the other retirement planning solutions. These funds are similar in nature to balanced funds, in that the portfolio has both a debt and an equity component. However, unlike balanced funds the equity exposure and portfolio risk is much lower. While most balance funds have 60 – 70% of their portfolio invested in equities, pension plans have only 40% or so invested in equities. The balance is invested in fixed income securities. Investors can invest either in lump sum amounts or through systematic investment plans. Post retirement the investors can withdraw their corpus on a lump sum basis or through systematic withdrawal plan chosen intervals (e.g. monthly, quarterly etc.) for regular income during retirement. The balance units post withdrawals in either case remain invested and continue to grow.
Pension plans offered by Mutual Funds do not get as much of mention, compared to the other retirement planning solutions like PPF, Insurance Plans etc. This is surprising, since the 5 to 10 year investment returns from mutual fund pension plans are quite good. UTI Retirement Benefit Pension Fund was the first fund to be launched in this space in 1994, followed by Templeton India Pension Plan in 1997. After a gap of 15 years, Tata Mutual Fund came out with a retirement savings fund in November 2011. On a 5 year annualized basis, these plans have delivered returns of around 10%.
The funds from UTI and Templeton have around 40% of their assets allocated to equity, while the balance is invested in fixed income securities. The equity portion of both these schemes investment in both the schemes is concentrated in large-cap stocks in the equity portion, whereas the fixed income has more of corporate bonds and government securities.
The Tata scheme offers three options:
The scheme automatically switches from one plan to another depending on the investor's age. At age of 45, investments under the progressive plan automatically switch to the moderate plan, while at the age of 60 investments in the moderate plan are switched to the conservative plan.
The chart below shows the 1, 3, 5 and 10 year annualized returns of the three comparable plans, UTI, Templeton and Tata (Moderate plan)
UTI Retirement Benefit Pension Fund and Templeton India Pension Plan provide tax savings of up to Rs 1 lakh under Section 80C. However, Tata Retirement Savings Fund is not a tax-saving instrument as its features are different from the above two. Returns from all the above three schemes are taxable.
In summary, while on an absolute basis the returns of these pension plans is not as attractive as equity funds, on a risk adjusted return basis their performance is quite good, especially compared to other pension products available in the market. Higher equity market returns over the long term make these products an effective inflation hedge for retirement. The UTI Retirement Benefit Pension Fund and Templeton India Pension Plan are suitable for investors with moderate risk profiles, while Tata offers variety of options for investors with different risk profiles. You should consult with your financial advisor if these products are suitable for your retirement objectives.
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