The word ‘retirement’ evokes different sentiments among different people. Some worry about expenses without a stable income, whereas some think of the liberation from the daily hustle-bustle of life. Whether a person is a salaried individual or self-employed, retirement means different things. As salaried people cannot pursue gainful employment beyond a specified age, it becomes a worrying factor. Self-employed individuals cannot ignore retirement despite retirement being a more flexible event of their life, as they get to decide when to retire.
No matter what sentiment the word retirement stimulates in your mind, you cannot ignore the financial dilemma that looms around it. In today’s day and age, there are a plethora of investment options to plan for retirement, unlike a few decades ago. Lack of regular income, growing lifestyle conditions, high cost of medical inflation, and the like are what make planning for retirement a challenging process. While planning out your decisions, ignoring a life insurance cover for your dependents can mean throwing caution to the wind. Here we talk about two products that can be useful in planning for retirement — ULIPs and Pension plans.
What are pension plans?
Pension plans are investment options specifically designed to provide a stable income during retirement when other income sources cease to exist. Life insurance companies offer these pension plans that help build a corpus during your earning years and provide a stable income during retirement. The accumulation phase of these pension plans invests your money, which generates sufficient returns to sail through your golden years over the long term.
These plans are further divided into two types — immediate annuity plans and deferred annuity plans.
In an immediate annuity policy, upon payment of a lumpsum amount, also known as the purchase price, pays annuity installments to the policyholder from the subsequent frequency that is opted for. No life cover is available for immediate annuity plans, and the payments stop in case of the policyholder’s demise or spouse, based on the option chosen in the policy.
On the other hand, a deferred annuity plan is a policy where a premium is paid usually to accumulate into a corpus. It is then used to buy an immediate annuity plan or invest in another deferred one at its maturity. A life cover is available for deferred annuity plans, which provide a predefined compensation for the policyholder’s death.
What are ULIPs?
Unit Linked Insurance Plans ULIPs are life insurance policies that provide an option to invest in market-linked securities. The premium for a ULIP is divided into two parts, life insurance coverage, and investment. This way, both protection and wealth creation objectives are met.
A ULIP allows the policyholder to choose different funds for investment based on their risk appetite. Equity funds, debt funds, balanced funds, liquid funds, and cash funds are some options to invest in ULIP funds.
Other than investing among a diverse range of funds, ULIP funds allow switching to amend your investment goals and include features like partial withdrawal after the mandatory lock-in tenure of five years. Besides wealth creation, a ULIP cover also focuses on providing death and disability benefits to the policyholder within the same premium payment.
How do ULIPs compare against pension plans?
Here are a few points based on which the difference between the two can be laid down:
Premium payment towards a ULIP cover is exempted up to ₹1.5 lakhs under section 80C of the Income Tax Act. Any income from a ULIP body for the policies issued after 01st February 2021 with annual premiums of more than ₹2.5 lakhs (i.e., high-value premium policies) are taxed as per applicable tax laws. However, all other plans issued before the said date and with a lower annual premium enjoy exemption under section 10(10D) of the Income Tax Act.
With pension plans, any payment towards its purchase is exempt under section 90CCC of the Income Tax Act up to ₹1.5 lakhs. Pension plans also attract a tax implication at withdrawal, where only one-third of the amount is exempted under section 10(10A) of the Income Tax Act.
There is no guaranteed return for a ULIP cover. The returns for the policy depend on the fund invested. The risk and returns of a ULIP body are correlated.
Pension plans provide a minimum guaranteed return awarded at the time of retirement.
Apart from these changes, several other costs are involved in ULIPs. ULIPs deduct up to 1.35% of the premium paid towards fund management charges. These charges are on the higher side compared to pension policies, which only levy 0.25% of the premium paid towards its fund maintenance charge.
When deciding which plan to choose, ULIPs can be a nifty way to achieve the objective of wealth creation and protection for life.