Retirement planning is an important investment decision. When it comes to retirement planning, the earlier you begin, the better it is for you. There are several investment options to ensure that there your hard earned money remains safe and provides you with good returns in your golden years. Among the most popular options are Unit Linked Pension Plan and New Pension scheme. Both the plans are known for their good returns as well as for the protection of the invested funds. A prudent investor may diversify the portfolio by investing in both the instruments. However, before making any investment it is essential to know the basics of the instruments. Its pros and cons should also be properly evaluated.
Unit Linked Pension Plans:
These plans are popularly known as ULPPs. This instrument had been controversial for a while and it almost vanished from the market in 2011, when owing to regulatory guidelines, it was required to provide minimum 4.5 percent return on investment. At that time, ULPPs accounted for about 20 percent of the insurance business in India. After extended negotiations, ULPPs were guided to offer capital protection instead of minimum return. This means that ULPPs need to operate on at least no loss, no gain basis. These companies are now obliged to protect investor’s money. Once the regulations were changed, various financial services companies relaunched their products. Currently, many reputed financial services companies and banks offer ULPPs. These are Birla Sun life and HDFC Life, among others.
Despite the inherent risk profile of the incitement, the response to these schemes has been tremendous. These plans have high risk profile than traditional pension plans. Consequently, ULPPs also offer better returns than the traditional plans as these plans invest their funds in equity market. Now, these plans come with the added benefit of capital protection program, which ensures that the investors will get their investment back no matter how bad the fund performs. There are various fees and charges related to these plans, which an investor should take into consideration before making any investment commitment.
ULPPs come with five year lock in period and thus are not very liquid investment option. However, the regulations place a cap on surrender charge as the investment company may not charge more than Rs. 6000, even if the money is withdrawn before the tenure of 5 years. During the first five years, there cannot be more than 4 percent gap between the return on investment and net return. This percentage is brought down to 3 percent after its tenth year. After fifteenth year, the percentage plummets to 2.25 percent.
There are various parameters which determine the rate of return you may receive from your ULPPs. The extent of equity exposure, management expenses and tenure are the biggest factor to have big impact on the rate of return. This scheme is good for investors with average risk appetite. It is also suitable for people who do not have the time to directly invest in the equity market.
New Pension Scheme:
This system is a good way to save money for retirement. This instrument is long term in nature. New Pension Scheme is universally available for any Indian between the age of 18 and 60. The system requires minimum investment of Rs. 6000 per year. This amount may be paid in 4 to 12 instalments spread throughout the year. There is no upper limit on the contribution that can be made under this system. The system also offers tax benefits.
New Pension Scheme uses its funds to make equity investments and thus it is able to generate higher average return rate. However, the rate of return cannot be determined in future and therefore investors with low risk profile should not investment huge amount of funds in this system. In this regard, National Pension System is akin to ULPPs.
This system is available in two variants. The first variant aka Tier 1 is non withdrawable where as Tier 2 schemes allow the investors to withdraw their funds, subject to certain restrictions. The tier 1 scheme requires minimum payment of Rs. 500 per month or Rs. 6000 per annum. This amount needs to be paid till the investor reaches the age of 60. However, there is no such requirement of Tier 2 schemes. This scheme does require the minimum balance to be paid. Only the investors with tier 1 pension plan are eligible for tier 2 plan system.
Comparing the two
In certain ways, both ULPPs and New Pension Scheme are same type of investment. Both the instruments invest their corpus in equities as well as in government securities. Both instruments run various schemes to meet the requirements of different types of investors. These schemes differ on the basis of their investment venues and the percentage of the corpus invested in equity.