Can Pension Plans Play Big Role In Retirement Planning?


Retirement Planning

Have you ever wondered how much money do you need for retirement? If you are a well-aware investor you would have already worked to find an answer to this haunting question. But there are many who are blissfully ignorant about retirement planning and are marching ahead in life without any financial, investment or a retirement plan. Planning for retirement is important, it's not something that you can afford to put on a hold. It has to be dealt with on a priority basis.

If you are in your 30s and you haven't yet started planning and investing for your retirement, it's high time you should start. The key to being successful in your financial planning is to start early. The sooner you start more time you get to invest and time translates into high returns thanks to compounding.

What Are The Ideal Investment Instruments For Retirement Planning?

To accomplish all your financial goals you need a lot of time and a plenty of help from investment instruments like Mutual Fund, PPF, Pensions Schemes, etc. All the investment mediums play a crucial role in different aspects. Mutual funds give good returns in the long run while also help in saving tax. Direct equity investment is rewarding and tax-free if held for a long time. But then what role do Pension Plans play in your planning? That's an interesting question.

Let's Understand The Relevance Of Pension Plans

There are different pension plans. Some plans are designed to be maintained by employers in which the part of the employee's salary goes to a pension account. On the other hand, there are individual plans in which individuals save in the government-sponsored schemes or private banks to secure their financial future and protect them from any uncertainties that may arise post-retirement.

National Pension Scheme

National Pension Scheme was launched by Pension Fund Regulatory and Development Authority (PFRDA) in 2004. It is the most cost-effective Government supported pension scheme for Indian citizens in the age group of 18-60.  For this scheme, the minimum annual contribution is Rs.6,000, which can be paid in one go or in small parts of at least Rs.500.

There are 2 types of NPS accounts: Tier-I and Tier-II account. Tier-I it is an obligatory account while Tier-II is voluntary. The difference between the two is mainly related to the withdrawal of money invested in the scheme. In Tier-I account, you not allowed to withdraw the entire amount until retirement. Even after you reach the retirement age, there are certain conditions on withdrawal. In case of Tier-II account, the subscriber is free to withdraw the entire money.

Are The Returns Good In NPS?

In terms of returns, NPS has several issues that pull it down. Now that it has been proven that equity gives the best inflation-adjusted return as compared to any other assets class i.e debt, gold, and real estate, NPSs looks a little less impressive. In NPS 100% equity investment option is not available, it's only up to 50%. Moreover, unlike other investment schemes, at the end of your investment term, you don't get to withdraw your entire corpus in NPS. Here it is mandatory to invest minimum 40% of the corpus in an Immediate Annuity scheme which in return gives you a lifelong pension. On top of that, though the income in NPS is not taxable the amount you receive in an annuity is taxable.

Is Mutual Fund Better Than National Pension Scheme?

As mutual fund offers more flexibility and tax benefits it is easy to say that mutual fund fares far better than NPS. But let's take a look at all the aspects which make the mutual fund a better investment option.

In mutual funds, you are free to withdraw your corpus anytime you wish. There is no condition of purchasing the annuity however, you can always get an annuity if you wish to. You get to withdraw your investment whenever you wish to in lumpsum or via Systematic Withdrawals Plans (SWP) which can also work like an annuity.  On the tax front, in the mutual fund, you get long-term capital gains on equity and balanced funds which give you tax exemption.

Final Word

All the above-mentioned points suggest that in a mutual fund you get better control over your investments. From the selection of your asset allocation to the variety of funds to choose from i.e. equity funds, debt funds and liquid funds you enjoy a lot of freedom and flexibility. This kind of freedom is completely missing from pension plans. Thus in terms of control over investments and returns, mutual funds fare way better than pension schemes.