When you are young, the last thing you may think or worry about is retirement. If you are in your early 20’s and just started your career, retirement may seem like it’s a long way to go. But experts suggest that you must start thinking about your retirement as soon as you start working. This is crucial to make your post-retirement life secure and more enjoyable.
A small saving throughout the work-life can help you build a significant corpus over time. You can use this amount to take your expenses during old age without being dependent on anyone. The relevance of such planning has increased today as life expectancy has increased.
Today, many financial products in the market help you get a regular income after you retire. Some of these plans are market-linked, like the ULIP or Unit Linked Insurance Plan and others may be non-linked. Each of these products has its unique features and benefits. And, if you are wondering which of these plans are better, you must first have a clear understanding of how these plans work.
The different pension plans differ in annuity payment options, premium payment patterns, investment opportunities, duration of benefits, annuity, etc. Although ULIP is primarily an insurance product, it also offers retirement benefits.
Let us look at the difference between ULIP and other pension plans.
Tax Difference
Typically, pension plans offer valuable tax benefits that allow you to reduce your annual tax liability. The amount you invest in the retirement plan is eligible for tax deduction up to Rs. 1.5 lakhs per annum under Section 80CCC of the Indian Income Tax Act. However, when you withdraw funds from the pension funds, there can be tax implications.
Depending on the type of pension plan you invest in, only one-third of the withdrawal amount is tax-exempt under Section 10(10) A of the Income Tax Act. The remaining amount becomes taxable as per your regular tax bracket.
However, in the case of ULIPs, the premium you pay is eligible for tax benefits up to Rs. 1.5 lakhs under Section 80 C of the Indian Income Tax Act. In addition, the withdrawals from ULIPs are entirely tax-free under Section 10(10D) of the IT Act.
To claim the deduction under Section 10(10D), you must meet the following conditions:
- You must hold the ULIP for at least five years and keep the policy active by paying the premium regularly.
- The sum assured of the policy must be at least ten times more than the premium paid in all these years.
- If you stop paying the premium before five years, the tax deduction you availed of earlier will be reversed, and it will be taxed accordingly.
Cost and Expenses
As compared to pension plans, ULIPs may have higher maintenance charges. You must pay fund management fees, which is usually about 1.35% of the investment amount. The other pension plans like the NPS (national pension scheme) charges0.25%. Higher costs associated with ULIPs is one of the critical factors that discourage people from investing in ULIPs as it can eat up the overall fund value.
- Guaranteed Income
Pension plans are known to provide assured income during old age. As per the IRDAI guidelines, every plan must provide a minimum guaranteed amount. The ULIPs, on the other hand, do not provide guaranteed income, but since it provides market-linked returns, it has higher returns potential than other retirement plans.
The returns you get from ULIPs greatly depends on the asset selection. If you have invested a significant portion of the investment amount in equity funds, you have better chances of getting high rewards. But, at the same time, since such funds are subject to market variation, there is no guarantee of returns.
Final Word
So, the answer to ULIP vs Pension Plan – which is better? Ultimately boils down to your preference, financial goals, and risk appetitive. Assess your needs carefully and invest in ULIP or Pension Plan accordingly.
