Planning for your retirement early in life is one of the wisest things to do. After all, you wouldn’t want to be dependent on anybody to meet your basic financial needs. In fact, smart planning at an early age can help you fulfill your dreams that you had possibly forgotten. For instance, you could go on a world tour with your significant other once you hang your boots. Or if you have kids who are dependent on you, a retirement corpus will come handy when they go for higher education or important events such as their marriage. While you may think that traditional pension plans are a good way to invest and save, but here’s the catch. Traditional plans are inclined towards investment in debt funds as they assure a guaranteed sum assured at the end of the policy tenure. Since a large part of the investment is in government securities therefore the returns on traditional plans are not big and hence may not be able to beat the inflation by a long margin.
The other alternative could be unit-linked retirement plans. If you are flinching at the thought of putting in your hard-earned money into equity-linked ULIPs, then hold the thought, we are listing down a few reasons why you should opt for new low-cost ULIPs over traditional retirement plans.
As stated above, unit-linked pension plans offer higher returns on your investment. Thus, you can build a big corpus by the time you retire giving you the much needed financial cushion that one requires in the in their old age. Now, in an equity-linked ULIP retirement plan, your returns are expected to be much higher as the money is invested in equity markets. Allow us to explain with an example.
Let’s assume that you buy a ULIP plan for a one-time investment of Rs 50,000 for 30 years. Now if you choose an equity linked ULIP, the post-tax returns on your plan after 30 years would be nearly Rs 25 lakh, if your money grows at 14% . This is so because the charges on ULIPs are much lower than other investment avenues. Overall charges are as low as 1.5% on ULIPs.
Make the switch
Apart from higher returns, ULIPs also give you the choice of choosing your choice of investment option. So, if you do not have the risk appetite and are not comfortable with the idea of investing your money in equity markets, you can choose to invest in the debt market through a ULIP. Furthermore, if you feel that the market is going great and the returns on an equity-linked plan would be much higher than what your returns on debt-linked ULIP, you have the option of switching your fund option.
In a ULIP, an insurer gives you the choice to switch your fund options four times in a year. However, the catch here is that you should know when the right time is to make the switch.
Topping it up
You are 30 and you decided to buy a ULIP for an annual premium of Rs 50,000. Few years down the line, your income has grown substantially and you want to invest this surplus somewhere. So what’s better than adding it to your retirement corpus—an option only available in ULIPs. Unlike in the traditional pension plans, your insurers gives you the opportunity increase your investment in an ULIP pension plan, thus assuring you a higher return by the time you retire. However, you need to pay a premium allocation charge on the top-up premium, which is anywhere between 1% and 3% depending on the policy. Remember, this is less than what you pay for a fresh policy.
For instance, if you are paying an annual premium of Rs 50,000 in a ULIP for 30 years, then your investment after 30 years would be nearly Rs 2 crore assuming 14% returns. Now, let us assume that the company charges 20% in the first year and 2% from second year onwards, the actual investment would be Rs 14.6 lakh. Five years later, you want to raise your investment in the plan by Rs 20,000 taking your investment to Rs 70,000, your insurer will charge you premium allocation charge of 1% to 3% on your total top-up investments (Rs 6 lakh) i.e. anywhere between Rs 6,000 and Rs 18,000. Assuming that the insurer charges 3% as premium allocation charge, thus Rs 5,82,000 will be invested in the fund opted by you. So, when the policy gets matured, you will get nearly Rs 2.50 crore.
To conclude, old age is no joke and one needs to be prepared for contigencies. And with the way things are today, we won’t be surprised if the costs of your daily needs skyrockets by the time you decide to hang your boots. So it is better that you do some serious thinking and plan for the future wisely.
The author is co-founder & CEO, PolicyBazaar.com