Wednesday, March 5, 2014

7 Benefits of Buying Traditional Pension Plans

Retirement is an inevitable phase of life. One of the many products life insurance companies offer people for retirement planning is pension. Pension is aimed at securing your post retirement life, be it related to financial security, pursuing a hobby or planning a legacy. There are many reasons why one needs to plan well for retirement – increase in life expectancy, inadequate employer funded pension, change of social structures, absence of social security system, desire to remain a contributor or rest and relaxation.

Pension products can be offered either on ULIP (market linked) or Traditional (non linked) platforms. Given the nature of these products, ideally one would want to de-risk his/her retirement plan from market volatility. That’s where traditional Pension products have an edge and have been quite popular among customers. Traditional retirement solutions are of 2 types:

  1. Participating - These plans participate in profits of the fund. 90% of the profits get distributed to the policyholders as bonuses. Hence, these are also referred to as ‘with profits’ plan.
  2. Non Participating - These plans do state a rate of return at outset and are not linked to the market or any index. They offer guaranteed returns.

How does a Pension Product work?

An illustrative representation of how the plans works is as below:

-- You save regularly till you reach your retirement or do it using a lump sum as per the availability of funds. On maturity, the benefits are mandated by regulations to be reinvested, in order to generate a regular income stream, which is referred to as annuity. This feature is what makes pension plans a good fit for retirement planning.

Key advantages of buying traditional pension plans:

  1. Secure Returns: Traditional pension plans offer secured and guaranteed returns. For participating plans, the secured returns are in the form of bonuses. Once declared, bonuses are guaranteed to be paid at maturity or death. For non-participating plans, the secured returns are in the form of additions. These additions are fixed percentages of the sum assured that are added every year or on maturity. Today in addition to the above, traditional pension plans also have a minimum guaranteed benefit at maturity and on death.
  2. Easy Issuance: Pension Plans are the true over the counter plans. They do not require any medical tests and hence can be purchased without much of a hassle. This feature makes a pension plan possible for all, irrespective of their health condition.
  3. Guaranteed Income for Life: On maturity of the pension plan, one needs to purchase an annuity. This annuity is a guaranteed income stream for a lifetime. This helps in meeting post-retirement needs.
  4. Tax Benefits: Premiums paid in traditional pension plans are eligible for tax benefit u/s 80CCC of IT Act. This is subject to the prevailing tax laws.
  5. Health Care Needs in Old Age: Health expenses are a major concern during old age. With improved life expectancy and increased medical expenditure, it’s imperative that health care expenses are kept in mind while doing retirement planning, more so because during old age, the eligibility for a health assurance or life assurance have their own limitations. By investing in Pension plans one can easily create a fund for any contingency.
  6. No Limitation on Maximum Premium: You can invest as much as you need into these plans. Investing higher amounts means you have a higher chance of better fund creation and consequently better income post retirement.
  7. Death Benefit: Though the primary objective of any pension plan is to build a corpus for post retirement expenses, it also brings with it benefits on death of the life assured. The nominee then can either choose to take the complete death benefit or can invest the same in an annuity plan that will offer a guaranteed income for life.

An individual should always keep the following in mind while planning their retirement:

  1. Maximum duration for the investment horizon in order to build adequate corpus
  2. Starting early to gain from the effects of compounding
  3. Investing as much as you need

Source: HDFC Life insurance

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