Best pension plans in india – Disadvantages and Advantages

What are pension plans and how do you identify the best pension plan in India? Is it the LIC pension plans or some pension plan policies from pvt companies or some unit linked plan from companies claiming to provide you with Rs. ‘X’ for ‘Y’ numbers of years once you retires? In this article we will see some of the disadvantages of pension plans in India and how they work.

Pension Plans in India

A lot of investors think that retirement pension plans are the only way to go; and if they do not invest in these products today, then they will miss out on something. In this article let’s talk about pension products. Before I move ahead I would like to coin two terms used in Financial planning which are very easy to understand.

Accumulation Phase : Accumulation Phase is that period of your life, where you invest regularly each month and “accumulate” the Wealth. You start getting pension later in life.  So when you invest your money in ULIP’s, Mutual funds, Direct Stocks or anything else you are into accumulation phase.

Distribution Phase : This phase refers to period when you start withdrawing money from your already accumulated wealth for consumption purpose. So at the time of your retirement or even before that, when you start taking out certain amount per month for next ‘N’ years, that’s called distribution phase.

Best Pension plans in India

Two major categories of Pension Plans

Let me start by taking about pension plans and their types. There are mainly two type of pension plans at broad level.

Deffered Annuity Plans : Most of the pension products in india are sold by LIC and all the private companies are deferred pension plans. These plans have accumulation phase inbuilt in itself and hence you first pay premiums for ‘X’ number of years. Once you retire, then you start getting pension income. You can see these types of plans all over the market. Some examples are LIC Jeevan Tarang, LIC Jeevan Nidhi , Bajaj Allianz Swarna Raksha ROC , New Pension Scheme (NPS)

Immediate Annuity Plans : These products are called immediate annuity plans because they start paying you the annuity right from day one once you make a lumpsum payment. So if a person wants a monthly pension and has huge lumpsum money, he can buy an immediate annuity plan and start getting pension. It’s a simple product which is not so much popular in India like deferred annuity plans. Some of the examples of immediate annuity plans are  LIC Jeevan Akshay , ICICI Pru Immediate Annuity , HDFC Immediate Annuity .

4 reasons why you should not buy deffered annuity plans

Let me tell you 4 strong reasons why you should avoid buying pension plans in India .

1. There are better options for growth of your wealth

The accumulation of your wealth happens in a pension plan for many years, but it’s not the best way your money can grow, ultimately if you had to invest your money in equity (underlying asset class), you have simple and no-cost options like mutual funds, index funds. Also you can choose to put money in real estate. A regular SIP in an equity diversified mutual funds should give much better returns then accumulation in a pension plan (read unit linked products).

2. No predictable returns for annuity

The core function of a pension plan is to give you pension. But do you know how much returns you will get out of your pension plans when time comes for retirement? A lot of pension products do not give a clear idea on how much will you get at the end. What is the return earned is around mere 4%? What will you do? The same is true for NPS.

One major (I mean MAJOR) DRAWBACK is you have no clue what will happen once you finish the accumulation stage and go on to the withdrawal stage. Let us say you have accumulated Rs. 500 lakhs in a NPS account. They allow you to withdraw say 50% of the amount and the balance has to be invested BACK in an annuity. Let us say you ARE FORCED to invest Rs. 250 lakhs in an annuity which pays Rs. 11,000 per month as a pension…looks good? Well depends on what you are capable of doing with your own money!

says PV Subramanyam in this article 

At this point of time, the better alternatives would be old fashioned products like Post office monthly schemes , Fixed deposits with monthly payouts or even senior citizen savings scheme. these all give near inflation returns atleast .

3. Rigidness and no flexibiity

Almost all the pension products are rigid in taxation and what you can do with your money at the end. Under current laws you can withdraw only 1/3rd of your accumulated money tax-free, where as there is long term capital gains at the moment is 100% tax-free. Also it’s compulsory to buy annuity for the remaining money. What if I want all my money for some reason at the end? What if I don’t have a requirement for income later?

These problems won’t be there if you accumulate your money in plain vanilla mutual funds or PPF or other simple investment products.

4. High charges

Who does not know how ULIP’s and other similar products have charged so high costs for initial years without giving clarity to customers. These annuity plans also have high allocation charges many times and customers do not know about it and can’t do much later when he acknowledges it! So why do you want to pay high fees for these products?


It’s suggested that you invest in some instrument which does not have any rigidness on what can be done with your investments at some later stage, like Mutual funds, Direct Equity, PPF, Index Funds, Real estate or even old fashioned products like FD, NSC, KVP… You can create your own accumulation stage and when the time comes for “distribution phase” (pension), you can always buy some immediate annuity plans or create your monthly income through ways of renting out property, getting FD interest or plain dividends from stocks or any combination of these. I hope you have got a fair understanding of what are pension plans in India.

319 CommentsAdd Comment

  1. Pradeep

    Hi Manish,
    Thanks for your Financial awarness campaign for the common man.
    As suggested,if mutual fund through SIP is a good route for retirement planning, what happens if the market crashes or economic slowdown during our retirement stage? .How to be on a safer side?

  2. ansh

    Hi Manish,

    I am 39, working in a private company with a package of 10LPA.
    I have a home loan of 30Lac and invest in LIC life cover policy of 20K yearly.
    Kindly suggest me the best Pension Plan and SIP suited to me, to invest in.


  3. Jaidee

    Hi Manish,

    I read you article, I changed my mind and will not be investing in pension plans anymore. Thanks for your efforts in making people understand.

  4. ashok

    Best pension plans in india-It is a great article and eye opener for those who are not much aware about financial planning.You are doing a great service to society by spreading financial awareness among people without taking any fees where there is so much mis-selling of financial products.

  5. shyam

    Hi sir,
    So plz help me to find a way to investment. I m now 30. I m a wb govt employee. I earned 22k /m & single. Next year I will get married. I wanna know for children’s plan for 15 year and pension plan for next 25 year. I have a hobby to explore various places.

    Thanking you,

  6. Nishant

    Hello Manish Sir,

    First of all thanks a lot for such a precise, informative and well structured article.

    Sir I have taken LIC wealth builder plan with following features:
    premium of Rs 1Lac PA,
    plan term -20 years;
    with fund on 100% debt allocation.
    Locking period is for 5 years.

    Shall I continue the plan for 20 yrs investment or take out money after 5 yrs.
    I am 31 yrs old and this investment is purely for retirement pension purpose; so my intent is to allocate the maturity amount to Post office saving scheme.

    Please guide if I can plan better than the present investment and also your due diligence on Wealth builder plan (SBI life).

    Many Thanks,
    Nishant Singh Rajput

  7. Hi Manish ,

    I m 35 years now ,need your advise on retierment planning , will retire on 45th year , i can invest for next 10 year from now and i m aiming to have a monthly 40.000 rs in distribution pahse . how to achieve this target ,in which to invest ,,kindly advise


  8. Kapil

    Hi Manish,

    I am 36 year old and an NRI. I have two plans and wanted to discuss with you whether I should continue these or not ? If discontinuing, will I be getting my money back or how much part will be returned. Happy to have a private conversation if you can guide me through.

    1) HDFC pension plan started in 2010 and haven’t paid the current installment due this month. I am paying 60000 annually in two installments. Current fund value is around 4 lacs.

    2) ICICI prudential smart kid: Paid 3 yearly installments of 55,000. I haven’t paid the current installment due in June/July.


  9. Suni

    Hi Manish,
    I have 2 questions
    1. I want to purchase pension plan for my Father (56) and Mother (49) who are already retired. Can you pls. suggest me some reliable plans. Premiums will be paid by myself.
    2. I am an NRI working in GCC my goal is to purchase house in Mumbai by 2017-2018 worth 45 lacs. At present I am willing to invest in NRE FD but later would like to invest in mutual fund but dont have any knowledge of MF.
    Pls. suggest me ways through which I can achieve my dreams.

  10. ssrimany

    Thanks a lot sir. for your valuable informative article. I am now at 40, I want to invest Rs 3500 to 4500 per month for next 12 to 15 years, can u suggest me which one of these options is best for me. I should mention i need (at the end of annuity period ) at least 25 to 30 lakhs ruppes. The options are A)Public provident Fund B)Mutual Fund C)Index Fund

    * I don’t Know exactly which is better, Mutual fund or Index Fund.
    Please advise me.

  11. ajitnaik

    Hi ,

    Was looking to buy Pension plan from HDFC that is when i found your article.
    My plan was to invest 1.5L per Annum for myself and same for my wife .
    My age now is 36 years and i can invest for the next 10 years at the same rate .
    Can you give me a option other than this plan .
    I have no problems to invest in options with high risks however i am not very good at stocks .
    Please advise


    Ajit Naik

  12. Kiran

    Hallo Sir,
    For days I was trying to understand what is annuity in pension scheme and overall pension scheme.
    Your above article is too simple and highly informative, it has clarified both how it functions as well as its dis advantages.

  13. Guruprasad Sohoni

    I want to invest RS.3000/- PM in any investment plan . Which Plan is best for me which Bank or Financial institute will help me .

  14. jillarapu

    Hi Manish,

    I am 34 yrs now, I want 1,00,00,000/-Rs in my 45th year Or I want 1,00,000/-Rs every month from 45th Year, can you suggest how much i need to invest in which fund / plan? I can only invest only for 5 yrs (2015 to 2020). Thanks.

  15. jillarapu

    Thanks for nice article Manish, I took SBI Smart Elite Plan (yearly 2 lakhs for 5yrs)…not sure how good this is? suggest me or route me any link on this question, Thanks

  16. Ravi Verma

    Ihave licsJeevan suraksha since 1999 .Annuity vestingis in 2021 should i conti ue or surre der .
    Another licpolicy is jeevan surabhi maturing in yr 2016 April.and childrens money back maturing on nov 2019.what should i do . Continue or not ?

  17. Kiran

    Dear Sir,
    It is indeed an eye opener, I was about to invest with HDFC retirement plan and after reading your article and others opinion better to go for SIP mutual funds.


  18. Pravin

    Hi Manish,

    Nice Article !!!! I was looking for an advice….

    I am investing 25000 Rs annually in LIC Market plus 181 pension plan . I am having Life cover and accidental death cover of 5lacks and 10lacks respectively.

    I have started the plan in 2008 and current return is 5.5% .. What should I do ? It is advised to wait long term to get market benefits .. Please suggest..

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