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Thou shall NOT BUY Pension Plans

It does not make financial sense to buy pension plans whether from insurance companies or mutual funds or the National Pension System.

1.  Buying annuity is compulsory
In pension plans, you have to compulsorily buy an annuity plan.

Pension Plans are a long term product. Suppose in the interim you have moved abroad and decided to settle down there. Or say you need money for your daughter’s marriage. Or you have moved to your native town and need money to buy a house. Or there is some medical emergency. All this will not possible with a pension plan.

On the contrary, if you had invested in other investment products, you could have possibly utilized the money in a more desirable manner. In fact you could have also bought an annuity plan with this money if need be.


2.  Taxation is an issue
One, on maturity you get to withdraw only 1/3rd amount as tax-free, whereas in EPF/PPF or equity MFs you could withdraw the entire amount as tax-free.

Two, the pension that you get is taxable. Since you have to compulsorily buy an annuity plan, you necessarily become liable for tax on the monthly payments that you receive from this annuity.

However, if you had the choice you could have opted for a more tax-efficient option available at that time. For example, if you were to retire today and had an option to choose amongst various investment avenues you could have possibly earned better post-tax returns from debt MFs than an annuity, without of course compromising on safety or regularity of returns.

That apart, even the so-called 80CCC deduction is more on paper only. Many of you would easily be exceeding the prescribed limit taking into account PF, Home Loan Principal, Insurance premiums, Tuition fees etc. Therefore, you may not be getting any tax benefit for your pension plan premiums.

3.  Flexibility suffers
Given that you are tied to one or two funds for possibly decades to come, the flexibility naturally suffers.

Pension plans being long term contracts, exiting prematurely from such schemes may not in most cases be permissible. And even if allowed to withdraw, there would usually be costs associated with such early exits.

In other investment products exiting or switching to other products may not be all that restrictive or involve penalties.

4.  Low diversification
Unlike say shares or Mutual Funds, where you would normally have a large portfolio, pension plans are typically restricted to only a few. In fact, because the main objective of buying a pension plan would most probably have been to save tax, most of you would be having just one or two pension plans in your portfolio.

Thus, with only a few plans to depend on, the portfolio becomes highly concentrated and hence the diversification too suffers.

Instead, with the same premium money, you could build a well-diversified and balanced portfolio of various investment products.

Concluding therefore, given that MFs, EPF/PPF and other such investment products have a lot more to offer, it may be prudent to create your own investment portfolio rather than buying Pension Plans. So, instead of making contributions to a Pension Plan, buy a suitable mix of MFs/PPF/EPF/Debt MFs.

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