Now a days a lot of young males & females are investing in Pension Plans offerd by almost all Insurance Cos. in India with a target to save enough for their sunset years. Once they are retired from their jobs, the accumulated corpus ‘ll provide the handsome pension, as the TV commercials of these Insurance cos. showcase.
If life is so simple, then there should not be any problem on earth. The basic problem with all such pension plans & investors who are investing in these plans, neither the plan providers (read Ins. cos.) are giving full details nor the customers (investors) are aware regarding their future – 1. What ‘ll be the accumulated corpus?
2. what ‘ll be the appx. returns (read pension)?
3. What is tax treatment of pension?
4. till how much time, the pension ‘ll be given?………
Not many people give serious thought on these aspects. The most cruicial part of retirement planning thru these pension plans is – people are not aware, How the income tax liability/applicability ‘ll impact their over all pension.
1. Premature Withdraw – If due to any reason, the person, wants to premature withdraw of this pension plan, the surrender amount ‘ll be added to the taxable income from all other sources in the Financial Year of Receipt of such surrender value.
2. Start of Pension – At the time of start of pension (also known as vesting age in Insurance Cos.), The investor may withdraw a max. 1/3rd amount of her/his accumulated corpus till date as Tax free Cash commutation. Balance ‘ll be used for pension generation. As per IRDA guidelines, the investor has option to put remaining amount with any Ins. co. which is offering max. pension on this corpus.
Normally people prefer to start pension @ age of 60 years. Now comes the most interesting part of taxation on pension plans. Whatever amount received as pension ‘ll be added to the income from all other sources in the relevent financial year & taxed accordingly. At the same time, the cash commuted part (if opted for) ‘ll also be invested in safe avenues like SCSS, Bank FDs, PO schemes, Etc. The interest earned from such investment as already taxable. Hence the total pension generated from accumulated corpus as well as interest income from CASH COMMUTED part is taxable.
Now comes the question – How we can manage to avoid such income tax on our pension?
If an Investor, wants to invest in UNIT Linked Pension Plans (ULPP) to receive pension, it is better to invest in whole life ULIP or at least age 75 ULIPs. The investor should note here that money received from Life Insurance policies are tax free under section 10 (10) (D) as per current indian tax law. So once the investor reaches the age of 60 (the noraml retirement age) s/he may start withdrwaing tax free pension from ULIP in the form of partial withdraw.
As already mentioned these withdrawls ‘ll be tax free. the added advantage in case of ULIPs as replacement of ULPP is, one can plan her/his withdraw according to need whereas in case of ULPP, a fixed sum ‘ll be given no matter, ur actual requirement is less or more than it.
While selecting ULIP as pension plan, always try to invest in the ULIPs which offers lowest cover multiple say 5X or 10X of ur annual prem. & the same time plz. don’t overlook the other aspects of ULIPs. Fund management charges, policy admin charges, Prem. allocation charges etc.
Hence make a wise call & if u r really interested to invest for ur pension, invest in a whole life or age 75 ULIP to get a “TAX FREE PENSION.”