Advantages & Disadvantages Of Pension Plans

When there are a host of investment options at your disposal, the choices that you make need to be measured and judicious. Retirement planning is an important aspect of your overall financial plan. You simply cannot afford the risk of running out of money in your retirement years. Thus, in addition to your regular savings, you must specifically chalk out a retirement plan that can cover your regular expenses in this phase and also provide a little extra to pursue your hobbies. In order to make the best investment decision you must understand the relative pros and cons of various retirement investment instruments. Retirement/pension plans can be a good investment for you and should form a part of your retirement planning. However, do go through the below pros and cons to understand whether this investment tool is for you or not.

Advantages of pension plans

Opportunity to diversify across asset classes – most pension funds give investors an option to choose the asset class to which they would like maximum exposure. As an investor you can choose amongst pure debt, pure equity or a mix of debt and equity. 

Benefits of long-term investing -  since these schemes invest for the long-term, your investments can reap the benefits of long-term investing. Pension plans ensure that a good corpus is accumulated by the time you retire and create an annuity which can provide a steady flow of cash post your retirement.

Multiple options for payment – pension schemes usually offer investors a great deal of flexibility in terms of how they want to make the payments. Investors can choose to invest a lump sum amount and receive immediate annuity payments or they can choose a deferred annuity plan which will let their corpus earn more interest until the payouts begin.

Can provide the benefits of a life-insurance cover – certain pension plans offer a life cover as well in which a lump sum amount is paid to the family member/nominee at the death of the insured.

Access to a lump sum amount during an emergency – investors are allowed to make certain adjustments to their pension policy and access funds in case of an emergency. These emergencies are pre-defined. 

Disadvantages of pension plans

Limited tax deduction – while investments in a pension plan are available as a tax deduction under section 80C of the Income Tax Act, 1961, the maximum allowable deduction is Rs 1,50,000.

Taxation on the annuity – annuity received post retirement, is taxable in the hands of the receiver.

Best suited for early investors – in order to reap the full benefits of a pension scheme, it is imperative that the investor starts contributing to the scheme as early as possible.