Pension Plans Vs Mutual Funds? What is the Suitable Retirement Instrument For You?

If you are someone who has decided to start planning for your retirement, then the question troubling you most right now must be about the right investment engine. A lot of people choose their modes of investment based on “herd mentality” which might not be the right choice always. Reason being that your financial situation and goals might be vastly different from the person sitting next to you.The first thing to do before you finalize your investment engine for retirement is to consider the following:

1. Your current debts and their strain on your current income
2. Your goals and priorities for your retirement - do you have travel goals, leisure goals, plans to buy property, etc. and what might they cost?
3. Your own and your family’s health

Once you have considered the above points and decided the amount required for your retirement corpus, you can start looking at either pension plans or mutual funds. Here are a few basic advantages and disadvantages of both, which will help you decide the right choice for yourself.

Advantages:

1. No need for investment in your retirement years: You only have to contribute towards pension plans till the time you are earning. Once you retire, you will be only receiving a certain amount of payout, either monthly, quarterly, or yearly. This is hugely beneficial because 20 to 30 years down the line the same amount of investment may not fetch you the returns that are being promised right now.
2. Uninterrupted and low-risk payout for life: Long term pension plans ensure that you get the same amount of payouts for life once you retire. The low-risk nature of these instruments ensures that they are not affected by the market conditions at that time and give you the peace of mind of a fixed and safe flow of money for life.

Disadvantages:

1. Long lockdown periods: The National Pension Scheme (NPS) doesn’t allow you to withdraw any amount of money for emergencies; neither does it allow you to withdraw a lump sum amount at retirement. A certain percentage of the maturity amount is also subject to tax.
2. No compounding: Unlike other savings schemes like EPF, PPF, etc. the pension plan interest is limited to 6 to 7% and that too, only on the principal amount (simple interest).

Advantages:

1. Tax savings: When you opt for an ELSS (Equity Linked Savings Scheme) Mutual Fund, you are eligible to save taxes under 80C, and choosing for a mix of mid and large caps is always better as they enable growth and more savings till you retire. Besides, the mutual funds are not necessarily locked until your retirement age, the amount can be withdrawn after the lock-in period of 3-5 years is completed in case you need it for emergencies.
2. Low-risk investments: Since you are investing in mutual funds for the long term, you can choose to invest in those which have higher returns and lesser market fluctuations because of the low risk.

Disadvantages:

1. Riskier for short term investments: If you are very close to your retirement age and need larger returns, then risking your money in high risk, and larger return mutual funds will not be a wise decision. You may end up losing your money because of the volatile nature of mutual funds.

In conclusion, choose a plan which suits your current financial situation, your retirement goals, and is appropriate for your age and your family.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.