Pension Plan Vs MF Corpus Creation…. Last Question in the fight

POSTED BY Samir ON August 22, 2012 11:08 am COMMENTS (4)

Dear Experts,

From this forum, I have read a lot about pros and cons of MFs way of creating corpus over ULIP Pension Plan. 

I do acknowledge the felxibility MF corpus bring over ULIP (while accumulating corpus and finally when going for Annuity)

I have a observation on taxation front. 

As everybody would agree, when we will reach closer to our retirement age we will start moving our equity MF investment to Debt MF (to save from market fluctuation).

At the time of retirement age, we will take out complete money (from Debt fund) to buy a annuity. My understanding is that this will attact LTCG or STCG tax as the case may be. 

Where as if I would have used ULIP, I would be saving on Tax completely…

Am I missing something?  Why we think the ULIP (without Tax implications) would be a bad choice? 

 

4 replies on this article “Pension Plan Vs MF Corpus Creation…. Last Question in the fight”

  1. Dear Samir, as per current tax laws, in your post retirement life, MFs are more tax friendly than Pension Plans (Annuity). We do not know the situation ‘ll remain same or not but instead of worrying for taxation down the line after 25-35 years, it’s advisable to focus on creating a large corpus.

    1 more important thing – please do not think of exiting Eq. altogether in post retirement life, you ‘ll need Eq. more in post retirement life with a less risky %age say 20-25-30% of your total corpus to see you through your post retirement life of 25-30 years.

    Thanks

    Ashal

    1. Samir says:

      Thanks Ramesh…

      Ashal… New to me.. but I agree with your perspective that Retiree should keep at least 20 to 30% in blue chip equity.

      Let me ask this in different way…

      Lets say you want to create a corpus of 3 Cr in next 16 years and want to retire after that.
      How you will approach (Consider you have all the money available to contribute in Monthly SIP). Your objective is to a) protect corpus as you reach retirement b) try to save as much as possible on tax (to save corpus again).

      Also how you will attempt to get decent monthly pension MIP? or dividend on Debt MF?
      or Annuity from LIC etc?

      Warm Regards
      Samir Gorey

      1. Dear Samir, As the time frame is 16Y, I w’d try to create a corpus of 4Cr. in next 13-14 years. Even if I ‘m able to manage 3-3.5C, I ‘ll try to shift at least 40% of the corpus to pure debt funds. Another 30% in MIPs & remaining 30% in pure Eq. funds.

        Please do remember, the above %age allocation is for me (for what I’m comfortable) & you w’d have to chose your own %age at that time.

        Regarding the immediate Annuity plans, I ‘ll look at the options at the time of actual need as I feel after 15-20 years from here on wards, the scene ‘ll be very much different than today.

        Thanks

        Ashal

  2. Ramesh says:

    1. Are you not thinking that, the tax laws will remain like this all throughout. They will change, how, when, we do not know.

    2. It is really ‘dumb’ to think that you should withdraw from equities at your retirement commencement. You will still be living for more than 25-35 years after that.

    3. By tying yourself to a single company (single Ulip), you may get a bad management after some time. Eg, currently even the good Ulip companies, namely HDFC Life, have drastically cut down on their fund management team, which will surely result in a bad performance of the portfolio over the coming years. Lock-in, mostly, is not a desirable trait.

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