Planning for retirement is one of the most important financial decisions in life. Pension plans can often form the core of that strategy. These plans offer a structured way to build a retirement corpus while ensuring future income. However, like any investment product, they come with both advantages and limitations. Let’s understand the pros and cons of pension plans, so that you can make more informed and suitable financial choices.
Pros of Pension Plans
Let’s take a look at the advantages you can enjoy with a pension plan:
Long-term Investment
The key feature of pension or retirement plans is that they help you build a corpus over several years (ideally, decades). So, by contributing to the plan (whether on a monthly basis or with a lump sum amount) and staying invested, you can benefit from the power of compounding. This means that the longer your investment term, the more potential there is for steady, reliable growth of your funds. For convenience, you can use a retirement calculator to determine the amount you will need to invest in order to get the desired payouts during your retirement years.
Investment Opportunities
Pension plans make retirement planning fairly easy by generating regular income in your golden years. The annuities received from these plans can then be used to create additional investment opportunities, whether it is through fixed deposits, government securities, or other low-risk options best suited for retirees. This way, your retirement income continues to grow, giving you even more returns.
Flexibility in payout
Pension and retirement plan usually offer flexibility when it comes to accessing the funds after maturity. You can either opt for immediate annuity payments, which begin payouts soon after investing, or choose a deferred annuity plan, where payouts start after a set period. In addition, you have the option to choose how frequently you wish to receive funds from the payout - monthly, quarterly, half-yearly, or annually. A retirement calculator can help you plan wisely in this regard.
Life insurance cover
Retirement plans can also offer the added benefit of acting as life cover. In case of the policyholder’s demise, the nominee can receive essential financial support, thanks to the payout of the plan. This feature of pension plans can help you manage retirement planning and family protection under the same umbrella.
Safeguards against inflation
Since retirement can span decades, it is important that the income generated during the years keeps pace with inflation. Fortunately, certain pension and retirement plans, especially those that invest a part of the corpus in equities, can help cushion the impact of rising prices over the years.
Diversification across asset classes
Another great benefit of some retirement plans is that they allow investors to choose which asset classes they would like to invest in. So, you can diversify your investments across options such as equity, debt instruments, and government securities, among others. This diversification helps balance risk and return, especially over the long term. More importantly, by spreading investments across different avenues, pension plans reduce the impact of market volatility and provide more stable growth.
Cons of Pension Plans
A pension plan also comes with its own set of disadvantages:
Taxable annuity**
The payouts received from retirement plans, in the form of annuities, are treated as income and therefore taxed accordingly. So, while the corpus grows tax-deferred, the actual income during retirement is not entirely tax-free.
Low risk, low returns
Most pension plans prioritise financial safety overgrowth, which is why they invest funds in low-risk instruments. As a result, the returns may not be as high as those from market-linked investments. Likewise, if you are looking for aggressive growth in retirement planning, you may have to rely on high-risk instruments (which may come with high volatility).
Lack of liquidity
Pension plans are long-term investment options. Once your funds are invested, they cannot be accessed until the plan’s maturity. Some plans may offer early exits or withdrawals, but those are usually accompanied by penalties or reduced benefits. This lack of liquidity can be a drawback for those who might need access to funds in case of an emergency.
Surrender value
If circumstances make you surrender your annuity, you may end up losing most of the benefits of the plan. In addition, many plans do not have a surrender value, meaning you may lose your accumulated benefits even after having paid the minimum premiums.
Pension plans offer long-term security and income stability, which makes them a reliable option for retirement planning. From tax benefits to guaranteed payouts, they bring several advantages, especially for risk-averse individuals. At the same time, factors such as limited liquidity and taxability need to be considered. Weighing both the pros and cons of pension plans can help you align your investments with personal goals, risk tolerance, and the kind of retirement lifestyle you have dreamt of.**
** Tax exemptions are as per applicable tax laws from time to time.
Customers 
Distributor 
Partner with Us 
Employee 
