Retirement Planning through Pension Plans

Pension plans (also referred to as retirement plans) are offered by insurance companies to help individuals build a retirement corpus. On maturity this corpus is invested for generating a regular income stream, which is referred to as pension or annuity. Pension plans are distinct from life insurance plans, which are taken to cover risk in case of an unfortunate event. However most Pension schemes in the market do have a life cover as well.
Conventional pension plans invest a major portion of the premium monies in bonds and government securities (G-Secs). That is why the returns are on the lower side. And if one were to factor into the equation an annual inflation figure of approximately 5%-6% per annum, then the real return figures look even more unimpressive.

This is where unit linked insurance plans (ULIPs) can play an important role in the retirement planning exercise. ULIPs have a mandate to also invest a portion of the premium in the stock market apart from bonds and G-Secs.
ULIPs have other important benefits like liquidity. You can withdraw money from a ULIP to meet emergencies. Also, you can invest surplus money (i.e. top-ups) over and above the premium amount. Some insurers have launched capital guarantee ULIPs. Such products aim to guarantee the premiums paid by the individuals (net of expenses) plus the bonus declared, on maturity. Individuals, who fear 'loss of capital' in a ULIP, will find such products attractive. However, capital guarantee ULIPs have lower equity exposure which could dampen returns for the aggressive investor.

Expenses loaded are pretty high in most pension scheme . First year expenses can be anywhere between 10% to 22% while second year expenses range between 5% to 15 % and there is also policy admin charges of about 500 to 1000 p.a.

Many may not be aware that there are two pension products available from mutual funds too . Templeton Pension fund and UTI Pension Fund are pension schemes eligible for 80 C benefits . Both are a mix of debt and equity. They are pure investments schemes .i.e do not have a life cover attached . There is NO ENTRY LOAD since August 2009 on these Mutual Fund  pension schemes.