By Vivek Jain
UnLIKE TRADITIONAL INVESTMENT products that may not be designed with retirement income in mind, Unit Linked Pension Plans (ULPP) bring together long-term investing, pension accumulation and regulatory safeguards within a single structure, making them a relevant addition to a retirement portfolio. These generally come with a mandatory lock-in period of five years, which encourages investors to stay focused on long-term retirement goals instead of making premature withdrawals.
Vesting stage
More importantly, ULPPs are structured around retirement outcomes rather than short-term gains. When the policy reaches its vesting stage, a portion of the accumulated corpus can be withdrawn as a lump sum, while the remaining amount is used to purchase an annuity that provides regular pension income.
Fund management
Retirement planning is ultimately about preserving purchasing power over decades. Inflation, particularly in healthcare and everyday living expenses, can significantly erode savings over time. Investments that rely solely on fixed returns may struggle to keep pace with these rising costs.
ULPPs address this challenge by offering exposure to market-linked investments. Because contributions are invested in equity and debt markets, they have the potential to generate higher long-term returns compared with traditional guaranteed pension products.
Another advantage is flexibility in fund management. Most ULPPs allow investors to switch between different investment funds during the policy term. This means policyholders can gradually rebalance their portfolio by reducing equity exposure and increasing debt allocations as they approach retirement. Such lifecycle-based investing ensures that portfolios evolve along with the investor’s age and financial priorities.
Tax benefits
Retirement-focused financial products often come with tax incentives to encourage long-term investing. ULPPs also offer tax advantages during the accumulation stage. Premiums paid qualify for deductions under Section 80CCC of the Income Tax Act, which falls within the overall `1.5 lakh deduction limit available under Section 80C. However, these deductions are relevant for taxpayers who opt for the old tax regime.
At the time of vesting, investors are allowed to withdraw a portion of the accumulated corpus as a lump sum, while the remainder is used to purchase an annuity that provides pension income. With current regulations allowing tax-free commutation of up to 60% of the accumulated corpus at vesting, a significant portion of retirement savings can be accessed without tax liability, while the balance is used to generate a steady pension through annuity.
For investors building a retirement portfolio, the objective is not simply to accumulate wealth but to ensure that those savings translate into dependable income later in life.
The writer is CBO, Life Insurance, Policybazaar
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.