Pension Plans vs ULIP plans: Which one is right for you?

A ULIP and a pension plan, both, come with their own merits and de-merits, based on the investor’s goals. Both these options have their own investment techniques and also provide maturity benefits.

Let’s take a look at what makes for the best retirement plans.

Why ULIPs score over Pension plans

Here are some of the advantages ULIPs have over pension policies:

Pension schemes and ULIPs are different when it comes to tax implications.

Whether you go for a ULIPs or pension plans, you will avail tax benefits. These tax benefits are provided under section 80C (for ULIPs) and section 80CCC (for retirement plans). When it comes to ULIPs, the maturity benefit is completely tax-free and is limited to the accumulation of the amount.

Even when it comes to the best pension schemes, you can only withdraw one-third of the complete corpus without attracting taxes under section 10 (10)A. The rest of it is payable via monthly pension, taxable in the hands of an annuitant.

Flexibility

ULIPs help you access your money more easily as it comes with the options to withdraw a component of the corpus during the plan tenure. It also offers the maturity benefit as a lump sum. When it comes to retirement plans, the policyholder is allowed to withdraw 1/3rd as the lump sum amount with the remaining 2/3rd is strictly paid only in the form of annuity payouts.

Why pension plans score over ULIPs

Let’s take a look at the sectors where pension policies score over ULIPS.

Guaranteed returns

Pension schemes in India come with a guaranteed income for your retirement session. According to guidelines set by the IRDAI, every pension should come with a minimum guarantee. However, ULIPs do not come the guarantee of income flow. Depending on the chosen fund, the returns can vary. Selection of funds that are less risky will come with the possibility of high return. A selection of an equity-based fund will depend on market variation. Therefore, the return from ULIPs will not be guaranteed. In the retirement phase, an uncertainty with income isn’t desirable.

Charges

The charges for pension plans aren’t exactly transparent. However, as compared to ULIPs, the charges (charges for switching funds, fund maintenance) are much lower.

With the discipline required to create a retirement corpus, a ULIP can help you do it, even if the benefits come with a universal usage. You can actually benefit from such type of universal usage in a cash crunch, where financing is desperately required. At the other end, if you are prone to investing in fixed return products or keeping your money idle in the bank account where it may be depleting your retirement corpus, a retirement plan could be an option as it will create a forced retirement corpus leaving no possibilities on using the corpus for other activities. Do not forget to consider the tax implications as well. Since annuity payouts are taxable, determine whether your income will qualify for taxation after retirement. Do this before you choose a retirement policy.

Analyse your situation thoroughly and make an informed choice for your retirement planning.