How you can plan retirement via pension plans

It is not mandatory that one has to use pension plan as an investment vehicle or as an investment instrument to put money into debt and equity route to accumulate corpus.

Gaurav Mashruwala

Certified Financial Planner

Below is the verbatim transcript of an interview aired on CNBC-TV18.

Q: Are pension plans the most efficient way to plan for retirement? Can you give us some rough calculations on what kind of sum assured a 30 year old might expect at the end of 30 years by investing in a pension plan if the sum assured is Rs 5 lakh?

A: Let me segregate between an asset class and an investment vehicle. An asset class includes debt, equity and of course gold and real estate, which one is not talking about today. In investment vehicles, one of them is pension plan. Pension plan helps one invest either into equity or debt. It is not mandatory that one has to use pension plan as an investment vehicle or as an investment instrument to put money into debt and equity route to accumulate corpus. It is important to do it on discipline basis and it is based on how far one chooses his/her retirement.

If one wants to put into equity to accumulate retirement corpus then one may use pension plan. One also have an option of doing a direct equity portfolio, there is also an option of using mutual fund. Similarly for debt, if one feels that retirement is near-term and want to put money into some debt-based instrument then one may use pension plan or have public provident fund, simple debt fund, fixed deposits and whole lot of post office schemes.

The reason I am against pension plan is because of the expenses that are charged. Since we are talking about market and macros, let me give a rough example, if somebody wants to buy a Tata Steel share and there are two brokers involved; one is charging a hefty brokerage of 5-6 percent and other is charging 0.5 percent eventually one is buying the same underlying asset, Tata Steel. The same way pension plan charges a hefty brokerage. Therefore, one wants to go to somebody who is charging less expense and giving an option of manoeuvrability. So, to put it in a nutshell, for retirement it is not important to put money into pension plan. One can use different vehicles, but be disciplined about it.

Q: The hefty brokerage is charged because an investment product is given along with it and therefore there are mortality charges and service charges. Is that the reason?

A: Yes, but the thing is that the death cover usually is not too large. It is just that the product, the way it has been pitched in, most of insurance products have heavy brokerages or commissions that are paid and hence the costs are more and one also lose the option of manoeuvrability.

For example, if I put in a particular pension scheme and two years down the line I feel it is not performing, it is not very easy for me to take money out and go somewhere else. Had it been my own equity portfolio, mutual fund, I have that option, which I can exercise easily.

Q: While choosing pension plans, should one opt for a deferred annuity plan or an immediate annuity plan?

A: If one is likely to retire in an immediate future then go for immediate annuity. So, the moment one puts in money starts getting an annuity. If one is not likely to retire in near future then deferred annuity is an option. One can do something else as well; one may probably want to invest in some other instrument as we are talking about earlier that can either create a portfolio for retirement and when one is nearing retirement take that money, go to insurance company and say give me immediate annuity. So, based on ones need either immediate annuity, if one needs money immediately. If it is long-term then either deferred annuity or create a portfolio and then pick up an immediate annuity.