ULIPS FOR RETIREMENT PLANNING

Retirement is the end of active employment and brings with it the cessation of regular income. Today an increasing number of people have stated planning for their retirement for below mentioned reasons



* Almost 96% of the working population has no formal provisions for retirement
* With the growing nuclearisation of family structure, traditional support system of the younger earning members – is no longer available
* Developments in the healthcare space has lead to an increase in life expectancy
* Cost of living is increasing at an alarming rate



Pension plans from insurance companies ensure that regular, disciplined savings in such plans can accumulate over a period of time to provide a steady income post-retirement. Usually all retirement plans have two distinctive phases



* The accumulation phase when you are saving and investing during your earning years to build up a retirement corpus and
* The withdrawal phase when you actually reap the benefits of your investment as your annuity payouts begin



In a typical pension plan you have the flexibility to make a lump sum payment or a regular contribution every year during your earning years. Your money is then invested in funds of your choice. You can opt to receive the annuity at any time after vesting age (age at which you become eligible for pension chosen by you at the inception of the plan).



Most of the Unit linked pension plans also come with a wide range of annuity options which gives you choice in structuring the post-retirement benefit pay-outs. Also at the time of vesting you can make a lump sum tax-exempted withdrawal of up to 33 per cent of the accumulated corpus.



In a retirement plan, the earlier you begin the greater you gain post retirement due to the power of compounding.



Let us take an example of Gaurav & Hari. Both of them want to retire at the age of 60. Gaurav starts investing Rs. 10,000 every year from the age of 25 till the time that he retires. In all, he would have invested Rs. 350,000. If his investments were to earn 7% return every year, at the time of his retirement, Gaurav will have a retirement corpus of Rs. 13, 82,368.



Now, Hari starts investing 10 years later (i.e. at the age of 35) and in order to make up for the lost time, invests Rs.15,000 every year (which is 50% more than Gaurav’s annual investment). So, by the time of his retirement, he would have invested Rs. 3,75,000. And assuming the same annual return of 7%, he will end up with a retirement corpus of Rs 9, 48,735.

So, you see how despite setting aside more than 50% of Gaurav’s annual contribution, Hari ends up with a retirement corpus which is almost a third lesser than Gaurav’s. That is the power of compounding.



Which is why, it is never too early to invest in a ULIP for retirement planning.