Why Should You Choose Mutual Funds Over Pension Plans for Retirement Planning

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Though mutual funds and pension plans both help in creating a fund for retirement, mutual funds have the upper hand.

Retirement planning is absolutely necessary so that you have a corpus at hand when you retire and need funds to meet your lifestyle expenses. When it comes to planning for retirement, there are various types of retirement investment plans which attract investors. Two of the most popular of them are pension plans and mutual funds. Many of you get confused over which avenue would be the best alternative for creating a good retirement corpus? Many argue mutual funds are better while some swear by pension plans. What do you think?

Thinking from the perspective of an average investor, mutual funds definitely score over retirement pension plans in creating a substantial retirement corpus. Here are the reasons why –

  • Mutual funds are flexible

Mutual fund investments give you flexibility both at the time of investment and also on redemption. While investing you can invest in monthly installments through SIPs (which are as low as INR 500 per month) or invest in one lump sum. The redemption is also flexible wherein you can choose to systematically withdraw from your funds every month (through a Systematic Withdrawal Plan) or access your funds at once. Pension plans don’t provide this flexibility. Though you can get flexibility in paying premiums (monthly premium, limited premium, single premium or regular annual premium), the maturity proceeds have a rigid redemption rule. You can only withdraw 1/3rd of your accumulated corpus in cash. The remaining 2/3rd would have to be taken in annuity installments which are paid throughout your lifetime. This annuity pay-out might not be suitable when you require lump sum funds for meeting an emergency expense.

  • The returns are better in mutual funds

The growth promised by mutual funds is better than those promised by pension plans, whether traditional plans or ULIPs. In mutual funds, the expenses involved are also low thereby increasing the return generated. Pension plans have lower returns associated with them. If the plan is traditional, the insurer invests in Government backed investment options giving very low returns. In case of ULIPs, there are a lot of expenses associated with the plan (administrative expenses, fund management expenses, mortality charge, premium allocation expenses, etc.). These expenses reduce the investment and thus the returns are lower. Even the annuity pay-outs paid under annuity plans are very low and do not earn market-linked returns.

  • The tax implication cannot be ignored

When it comes to tax, if you choose ELSS scheme of mutual funds, you can avail tax benefit on your investment under Section 80C. The same is true for pension plans. But in case of redemption the tax implication is different. Annuity payments received under pension plans are taxed. Only the commuted part is tax-free. In case of mutual fund investments, returns are taxed as long term and short term capital gains.

Given these benefits, mutual funds are the best retirement plans. You can start your retirement planning by choosing SIPs and investing an affordable amount every month. Thereafter, as your age increases, you should shift your investments to debt oriented funds to safeguard the generated returns against market fluctuations. Lastly, SWPs are a good way of redeeming your mutual funds partially to create a source of regular income in your retirement years. So, choose mutual funds and create an inflation proof and considerable corpus for your golden years.

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