How to Evaluate a Pension Plan

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There are very few retirement planning options available in mutual funds. At present, two funds, UTI Retirement Benefit Plan and Kothari Pioneer Pension plan fill the retirement mutual fund void. Both these schemes come equipped with Section 88 benefits and are therefore, on this count, at par with other retirement planning options like PPF, PF etc. Both the UTI Retirement Benefit Plan (RBP) and Kothari Pioneer Pension Plan (KPPP) allow the investor to plan for retirement, making it possible for him to receive regular income after retirement. Before an investor goes in for a retirement plan he needs to evaluate its various basic parameters:

Returns – In this case the comparison of returns vis a vis the fixed return instruments like PPF etc. is easy. The returns generated in the case of PPF is again, like Infrastructure Bonds, a fixed rate of 9.5 per cent unlike the returns of pension plans which can vary over a period of time. Also when it comes to comparing the returns between the two mutual fund options the investor must keep in mind, the track record of the scheme as well as his timing of entry. Both these factors will impact his return. However, in the case of infrastructure bonds, returns are fixed, irrespective of the time of entry. For instance Empirically, KPPP has turned in a better performance than Infrastructure Bonds so far. The fund has returned an annualised 15.20 per cent since inception as compared to a return of 9.5 per cent in the case of Infrastructure Bonds.

Lock in period – In case of fixed return instruments like PPF etc, the lock-in period is very long, with intermediate withdrawals after a certain number of years. In case of infrastructure bonds as well as pension funds the there is a 3 year lock-in period but in case of KPPP the withdrawal at the end of 3 years comes at a nominal penal charge.

Liquidity – In PPF, the liquidity is pretty low. A loan can be taken at the end of 3 years but even that is only to the extent of 25 per cent of the balance at the end of the preceding financial year. A withdrawal is permissible every year from the 7th financial year of the date of opening of the account. So, the loan and the withdrawal can be taken after a specified period of time and that too with certain riders. In the case of KPPP, the entire amount is withdrawable after the expiry of three years subject to a penal charge, otherwise the investor can exit only after reaching 58 years of age.

Rebate Eligibility –The tax benefits under both the PPF and the pension plans is the same in terms of the section 88 benefit which makes the investor eligible for tax benefits of 20 per cent of the amount invested in the scheme. The infrastructure bonds however offer an additional advantage in terms of enhanced amount of Rs 80,000 (link) of tax benefit under section 88.

Taxability of Interest/Dividend – Returns from PPF are tax free, Interest received on infrastructure bonds qualifies for tax exemption under Section 80L. This is not the case with dividend received from pension mutual funds like KPPP. Dividend received from KPPP is subject to dividend distribution tax of 10 per cent.

Minimum Investment – A minimum amount of Rs 100 has to be invested every year to keep the account alive in PPF unlike the facility of investing in instalments of Rs 500 in case of KPPP. Also the minimum amount that can be invested in the pension plans is Rs 10,000. In the case of bonds the investor has to bring in a minimum amount of Rs 5000

Maximum Investment – The maximum amount that can be invested under PPF in a particular financial year is Rs 60,000 whereas there is no such restriction on the maximum amount that can be invested in the pension plans. No tax benefit is however given for investments made above Rs 60,000 in the case of KPPP.

Investment Instalments – In the case of KPPP the minimum cumulative sum of Rs 10,000 can be invested in instalments of Rs 500. In the case of bonds the investor has to bring in the entire minimum amount of Rs 5000 in lumpsum.

Investment Mix – A comparison on this attribute is important when choosing between any pension plan offered by a mutual fund. Normally balanced schemes are offered. However, over a period of time the portfolio may vary. For instance ULIP has essentially become a growth scheme whereas KPPP is still focussed on debt though the equity component in the scheme has gone up over a period of time.

Additional Benefits – ULIP gives an insurance cover and an accident cover along with section 88 benefit, whereas, the other instruments do not offer this.

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