Market edge for your pension

Unit-linked plans from insurers and funds offer several benefits, say Narayan Krishnamurthy and Rakesh Rai.

Narayan Krishnamurthyand Rakesh Rai | Print Edition: October 30, 2008

Financial planners never tire of saying that you need to “pay yourself first”. This means you must set aside a part of your income for your retirement. The good news is that most salaried people are part of the Employee Provident Fund (EPF) scheme. The bad news: the 12% of the basic salary that flows into their PF accounts every month and an equal contribution by their employer is the only retirement planning they ever do. “For most individuals, the mandatory retirement benefit through employment is their only retirement plan,” warns Amit Gopal, vicepresident, India Life Capital.

What’s worse is that in many cases the EPF is used up for purposes other than retirement—a child’s education or marriage, building a house or even a medical emergency. This takes its toll on the nest egg. Says V. Srinivasan, CFO, Bharti AXA Life Insurance: “Most people dip into their PF accounts much before retirement.” The result: the individual doesn’t have a sufficiently large corpus to sustain his expenses after retirement.

Till a few years ago, government and public-sector employees were eligible for a defined benefit pension, which was calculated on the basis of the last-drawn basic salary and dearness allowance. The scheme is now being phased out. The employees who joined after 2004 are eligible for the New Pension Scheme (NPS), where the pension depends on their contribution (see ABC of NPS). Says Gopal: “Defined benefit plans have been done away in most countries owing to the huge cost to the exchequer in supporting such schemes.”

Anil Sahgal
"Invest your retirement corpus in a proper mix of equity and debt based on your risk appetite."

Anil Sahgal, Director (Strategy) and CIO, Aviva Life

The shift from defined benefit to defined contribution also means a lower pension. Private-sector employees are also members of the Family Pension Fund (FPF), but the contribution is so low that the pension would be peanuts.

This is where the pension plans offered by insurance companies and mutual funds step in to fill the gap. If your employer does not offer you a pension, you can buy a plan for yourself. All contributions to pension plans are eligible for tax benefits under Section 80C of the Income Tax Act. Besides, they offer greater transparency and flexibility to the investor. “The pension plans offered by us offer greater control to the individual, considering the kind of instruments that we can invest in compared with the government-controlled EPF,” says Anil Sahgal, director (strategy) and CIO, Aviva Life.

What he means is that these unit-linked pension plans can invest in equities as well, something that the government-managed pension schemes and the Provident Fund are not allowed to do. “Over 20-30 years of employment, the contributions, however small, have the potential to swell with even small exposure to equities,” adds Sahgal. But while equities lend zing to returns from the pension corpus, they also expose them to market risks. “Unlike government-run guaranteed schemes, pension plans from insurers or mutual funds depend on market performance,” points out Gopal.

More importantly, the individual knows exactly how and where his money is invested and is free to alter the investment mix. Unit-linked pension plans allow an investor to rejig the ratio of debt and equity investments to suit his risk profile and time horizon. When the vesting age is reached, the investor has a choice of withdrawing 33% of the corpus value in lump sum and the balance is invested in an annuity with a life insurance company.


The superannuation benefits from your employer depend on the size of the company. Here are the three most common retirement benefits offered by employers in India:
Benefit typeMandatoryPlan typeEmployer contributionEmployee contribution
Employees’ Provident FundYesDefined contribution (if managed by government)12% of basic salary12% of basic salary
GratuityYesDefined benefit of 15 days per year of service (maximum Rs 3,50,000 lump sum)Large companies typically fully fund the liabilityNil
Supplementary SuperannuationNoDefined benefit or defined contribution; no fixed formulaUp to 15% of basic salaryNil


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