Why pension products may not help plan your retirement well
Many of us engage in an economic activity to make a living. And with competition around we often work hard and try to give the best within our means to our family in times where inflation monster haunts us.
Many of us engage in an economic activity to make a living. And with competition around we often work hard and try to give the best within our means to our family in times where inflation monster haunts us. But while we do all it takes to keep our family happy, prudent financial planning can bring in solace in our endeavour to give best to our children and even save for the golden years of retirement. Mind you, many misconceive ad-hoc investing with prudent financial planning and often think they are on the right path to meet life goals. But let's apprise you that investing along with planning is rather a serious activity and often boring, as against the excitement depicted by the market intermediaries (i.e. agent / brokers / distributors / relationship managers), glamorous business channels and friends.
Today, while all of us want to have a cosy retirement life ahead the onus of indeed making it cosy ahead (during the golden years) is on us as investors. There are host of investment avenues available to plan for retirement, but it is imperative that you have the right mix of asset classes in your investment portfolio, which can help you achieve your goal of retirement. Annuity in the form of pension which takes care of our cash flows during retirement is something very much desire; but it imperative to plan for the same wisely and not get lured to inappropriate products, merely getting carried away by the exuberance created by the market.
We have often seen investors getting hooked on pension plans offered by insurance companies, in their objective of planning for their golden years. It is noteworthy that earlier, until the new guidelines on pension products issued by Insurance Regulatory and Development Authority (IRDA) came into effect, guaranteed returns were not offered to policyholders. But now by the virtue of new guidelines from IRDA, a number of life insurance companies are planning to launch pension products that will now offer capital guarantee - where you as the insured will at least get back the total premium paid.
Life Insurance Corporation, HDFC Life Insurance, Birla Sun Life Insurance and ICICI Prudential Life Insurance have already launched pension products while few others including Bajaj Allianz Life Insurance and Aegon Religare Life Insurance are mulling options.
But should you invest in these pension products?
Well we are of the view that, in the process of planning for your retirement it imperative to undertake a holistic exercise considering your:
• risk appetite
• existing assets;
• existing liabilities;
• intermediate goals (which you are catering to viz. children's education and their marriage), and
• nearness to goals
Taking into account the aforementioned along with the inflation factor (which haunts most of us and has eroding effect on our savings) would help you plan for your retirement prudently by having in place the right asset mix in your portfolio and investment avenues therein. But you need to act early, and not procrastinate executing the plan - as that may not help make your retirement life cosy. Moreover you got to refrain from digging into your retirement corpus, unless you absolutely need to (where your contingency funds are drained out).
The pension products from insurance companies, while they provide an annuity they do not help you optimally structure your retirement planning. The aforementioned new product launches are taking place since life insurers offering pension products withdrew them last year following IRDA's guidelines relating to pension plans that said all unit-linked pension plans (in which a part of fund is invested in stocks or bonds) should specify assured benefits on pension plans, applicable on death, surrender or maturity. So, there's no point merely getting swayed by the tall claims and sales pitch of your insurance agent. Instead it is imperative to have structured, intelligent financial plan in place for your retirement which can ensure smooth and cosy retired life ahead.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm