Which is Better – an Investment Plan vs a Pension Plan?

Investment Plans

Investment plans offered by the life insurance plans include endowment plans and Unit-Linked Insurance Plans (ULIPs).

Traditional endowment plans combine the benefits of life cover and savings. Part of the premium goes to cover the mortality risk, and the rest is invested in low-risk instruments that offer guaranteed returns. These plans are suitable for risk-averse investors. However, they may not offer inflation-beating returns over the long run.

Unit Linked Investment Plans (ULIPs) also offer the dual benefit of life cover and wealth creation by investing the major part of the premium into market-linked funds. Depending on your risk profile, you can choose the percentage allocation into equity, debt, and balanced funds. This allows you to build an inflation-proof retirement portfolio over the long term.

Benefits of Investment Plans

The following are the benefits of investment plans:

Wealth creation

Be it a traditional plan or a market-linked ULIP, both are designed for long-term wealth creation to meet goals like retirement, higher education, etc. Especially when you invest in ULIPs, there is a potential for higher returns based on the allocation chosen.

Flexibility

Investment plans give you the flexibility to pay premiums at a frequency ( monthly/quarterly/ half-yearly/yearly) suitable for you. ULIPs even give the option to switch between equity and debt funds depending on your changing needs and risk appetite.

Life cover

Along with the benefit of wealth creation, a small portion of the premium goes towards life cover against uncertainties during the policy period.

Liquidity

Traditional endowment plans may not offer liquidity. ULIPs offer the benefit of partial withdrawal after the completion of a five-year lock-in period.

Tax benefits

Premiums paid for investment plans qualify for tax deduction under Section 80C of the Income Tax Act, 1961. You can also enjoy tax exemption on the maturity amount under Section 10 (10D) of the IT Act, depending on the applicable condition.

Pension Plans

Pension plans or annuity plans offered by the life insurance companies are specially designed to meet the need for a steady income requirement post-retirement. These plans allow you to invest systematically over the working years to ensure you get a fixed pension after retirement. It works in two phases –

Accumulation phase, where you contribute regularly to invest in low-risk instruments ( traditional pension plans) suitable for risk-averse investors or in market-linked funds ( unit-linked pension plans) to generate higher returns.

Vesting or distribution phase, where accumulation of wealth stops upon reaching the retirement age ( for example, chosen year is 60 years). At this stage, you can either invest the entire corpus into an annuity plan to receive a regular pension or you can withdraw up to 60% of the corpus as a tax-free lump sum and invest the remaining 40% into an annuity plan. There are various types of annuity plans available with different payout options.

Benefits of Pension Plans

The following are the benefits of pension plans:

Wealth creation

Pension plans are specially curated to meet retirement goals. Hence, wealth creation over the long term is one of the key features of these plans.

Steady income

Unlike ULIPs, pension plans ( be it traditional or market-linked) ensure steady and assured payout (annuities) by investing in annuity plans after the accumulation phase.

Flexibility

These plans offer the flexibility to choose the premium payment frequency (monthly/half-yearly/yearly/single pay) and annuity payout frequency as per your need. There are also various annuity plans, such as lifetime annuity, joint life annuity, guaranteed period annuity, etc, to suit diverse requirements.

Tax benefits

Premiums paid towards pension plans qualify for tax deductions under Section 80C of the Income Tax Act. Also, 60% of the corpus on completion of the accumulation phase can be withdrawn tax-free. However, annuity payouts are taxable as per your applicable income tax slab.

Exploring the investment plans and pension plans on the Jio Insurance Broking online platform can help you compare all the options available in the market and then make an informed decision.

Which One is Better?

Both investment plans and pension plans have their distinct benefits. ULIPs offer life cover combined with potential for higher market-linked returns, along with flexibility and liquidity. On the other hand, pension plans are well structured to generate a steady income post-retirement, offering stability. Both plans are suitable for risk-averse investors to aggressive investors.

To conclude, choosing between the two can largely depend on your unique requirements, investment objectives, financial circumstances and risk appetite. It is wise to explore various plans offered by different insurance companies through Jio Insurance Broking, compare them based on your needs and then make the right choice.