Retirement is supposed to be the best period of your life when you get to relax and spend fulfilling moments with your loved ones. However, this is not always the case, as finance can become a cause of headache after you retire. The biggest challenge of retired life is adjusting to not receiving regular payments.
To tackle this, you must start planning your retired life as early as possible. If you invest in the right instruments, it is possible to build a corpus, which is significant enough to fund a comfortable retirement. The most popular options to achieve this objective are Unit-Linked Insurance Plans (ULIPs) and pension plans. Here, we explain which alternative can benefit you more.
ULIP is one of the most profitable investment avenues available today. Its best feature is that it combines life insurance with wealth creation. When you purchase the plan, ULIP fund managers use a portion of that to invest in debt, equity, or a mixture of both types of funds. The ULIP plans returns from these funds enable you to earn a large corpus, supporting you financially after retirement.
The insurance company also provides a life insurance cover, which secures your loved ones’ future in your absence. This quality of dual advantages makes the ULIP investment plan an ideal financial product for retirement planning.
What are pension plans?
Pension plans serve the purpose of offering you a steady income after your retirement. The high inflation rate in India makes it quite challenging to maintain a comfortable life post-retirement. This is why financial experts advises you to not rely on your savings only and ensure that monthly payments continue after retirement.
The workings of a pension or retirement investment plan are relatively simple. You pay a portion of your income towards the pension fund until the day you retire. On reaching the retirement age, you will start to receive frequent returns from the pension plan. This can help you take care of your daily expenses and you can continue to lead a luxurious life.
Which one should you choose?
Now that you know the differences between a ULIP investment plan and a pension plan, it is time to determine which one will serve you better. Here, we have compared these plans based on aspects, like:
- Tax exemptions
The retirement plan comes with tax deductions. Under Section 80CCC of the Income Tax Act 1961, the money you pay towards the plan is tax-free. Even though it has a maximum limit of INR 1.5 lakh, the money saved on tax can prove beneficial for you. However, the withdrawals received from this plan are not entirely tax-exempt. You do not have to pay any tax on the lump sum received immediately after retirement, which is one-third of the total corpus, but the annuity or regular payment is subject to tax.
In this regard, ULIP has an advantage over the pension plan. Apart from the tax-exempted premiums under Section 80C of the Income Tax Act 1961, Section 10(10D) ensures that you do not have to pay any tax on the ULIP’s maturity benefit.
Another ULIP benefit is that it gives you the opportunity to select how the fund manager can distribute your money into different instruments. You also have the choice to switch between the types of ULIP funds, depending on your changing risk tenacity and market condition. All these points make ULIP a more suitable choice for building a retirement fund in comparison to a pension plan.
Before you decide on where to invest, take some time comparing the pension plan and ULIP plans returns along with their additional benefits. This will help you opt for the appropriate investment vehicle.