Average salaries have shot up dramatically in the past few years. But other than government employees, most of us don't have the luxury of pension support after retirement.

The fear many of us have is, who will support us in old age? The answer to all these is to have inflation linked guaranteed pension plans. It is part of prudent financial planning. It is best to start investing in a pension plan at an early stage in life, like 25-35 years, in order to get a s u b s t a n t i a l amount each year once you retire.

As the gap between the contribution period and the vesting period reduces, the amount of annuity will become smaller, and then it will be difficult to get a meaningful pension, which also beats inflation

Understanding a plan

There are two types of pension plans —
1) Stock Market linked and
2) Traditional.

The traditional plans would offer a return of around 7%-10% in line with other debt options. Market linked plans could give higher returns in line with the market, but would be volatile as well. The investor thus has the option to choose the risk-return combination he would like. But pension plans are taxable and this reduces the attractiveness of this option.

A pension plan has two phases —
1) Accumulation and
2) Annuity.

In the a c c u m u l at i o n phase, the corpus is accumulated through yearly investment. On vesting (the day the accumulation phase is over), the corpus is used to purchase an annuity plan, which pays pension. This is known as the annuity phase. Different annuity options will give different returns.

Annuity options include guaranteed pension throughout the life time and guaranteed pension for the first 10 or 15 years. In case of death, annuity can continue till spouse's lifetime.

Differentiating factor

While choosing a plan, evaluate on parameters like minimum premium amount to be paid every year and number of years for which premium payment is mandatory. Look at the relative exposure to debt and equity of a plan and choose one that suits your risk appetite and look at the minimum and maximum accumulation period (considering the age of the investor).

Alternatives

Someone who doesn't want to go for a pension plan can look at unit linked insurance plans (ULIPs). Young people could use a ULIP that would provide tax free returns and in later years a pension plan could also be considered since the mortality costs in a ULIP would be higher and would eat into returns,. Keep in mind that the withdrawal amount from ULIP is subject to the fund's performance. One can plan for pension through other asset classes like mutual funds, monthly income schemes and post office senior citizen's pension scheme. One can also look at investing in a property that gives rental income for part of the pension requirement.

How much money you need

Usually, the current lifestyle is the benchmark for pension requirement. If currently you need Rs 3 lakh per year, then the same is inflated at 5% or 6% (the assumed annual inflation rate) for each year from now till the retirement year and you arrive at the pension amount. Then you should do a reverse calculation and determine how much you should save every year to meet the requirement.

An illustration

If a person is 30 years old and the retirement is planned at 60 years then an investment of Rs 30,000 per annum will give a pension of Rs 25,000 per month starting from the 60th year till the end of his life and also till his wife's death, if the scheme is chosen suitably. (For this illustration, accumulation is taken at 10% and annuity at 6%, which is conservative)