If you need a Retirement Plan, DONOT Invest in a Pension Policy!
Posted on December 17 2020
If you need a Retirement Plan,
Invest in a Pension Policy!
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If you need a Retirement Plan, DONOT Invest in a Pension Policy!
[Yes. This is not a typo!]
Hope all of you are safe and secure.
COVID has brought to the forefront, many of the in-securities that we all face with life, and one of the important factors, is the need on a Retirement Plan. With failing economies, companies, and job loss, medical risks, among others, many of us have woken up to the requirement of financial security in terms of a Retirement Plan and Term Insurance and Medical Insurance.
I feel, investing in a Pension Policy is one of the not so smart, things to do, from a Tax point of view. What you need is a Retirement Plan, and not a Pension Policy. There is a huge difference.
There are many Seafarers and NRI’s who have been lately investing in Pension Policies, being sold by many intermediaries (Banks and Insurance companies and Financial Advisors). I would refrain from taking specific names here, as it would ruffle many feathers.
The Covid pandemic, has made many of us realize the uncertainty of the future, which many of us, were ignoring, as things were going good and we were in the comfort zone. With global economic slowdown, job losses, localization and many other such factors; uncertainty is staring directly into our faces, like never before.
To secure the future financially, all of us require a Retirement Plan, where we can save money for our non-earning days or in times of job loss among other events.
However, most investors, being NRI’s, Seafarers and Residents alike, assume that a Pension Policy is a Retirement Plan.
A proper retirement plan, is a conglomeration of multiple products, which can provide the safety, security, liquidity and returns, that will meet your requirements, cash flows in the long term. A single Pension Policy can never make a holistic retirement plan.
A pension plan, generally invests in the same Debt and Equity as Mutual Funds, but have more charges. Hence your returns will not be guaranteed and lower than the average market returns. Hence, a Mutual Fund may give you much better returns than a Pension Policy.
A fixed (guaranteed) return Pension Policy, makes more sense in case there is no fine print and avoidable terms and conditions. However, generally a guaranteed return Pension Policy gives returns which are much lower than the general market returns.
There are many Financial Advisors who advise the Clients/Investors against investing in a Pension Policy, however, it is at the cost of losing business. There have been many instances when the Client goes to another Advisors and invests in the same Pension Policy. Hence, I see many Advisors have stopped giving proper advise to Clients, and go ahead with the Pension Policy investment, in order not to lose business.
Now the crux of this discussion is a Pension Policy. As per certain sections and clauses of the Income Tax Act (I will keep it simple):
- The maturity amount of the Pension Policy is taxable at your Slab Rate, which will generally be 30%.
- The premature withdrawal amount of the Pension Policy is taxable at your Slab Rate, which will generally be 30%.
- If you are an NRI, there will be a TDS @ 10-30% (depending on which country you are resident in as per DTAA), on the Full Amount withdrawn, either prematurely or on maturity, from a Pension Policy. Most investors are not aware of the TDS benefits of a DTAA, which can be generally availed by most NRI’s. Moreover, there may be a tax payable in the foreign country of residence also.
- On maturity, you will have an option to withdraw 1/3rd of the amount, without paying any income tax. The remaining 2/3rd has to compulsorily be commuted into a Pension (annuity), which is generally investing this amount into a new policy.
- The pension received from the Pension Policy is completely taxable in India and may be taxed overseas in your current country of residence also.
In case any Pension Policy actually reinvests in an Annuity on maturity, which is like a new policy, you can very well do the same, yourself, at a later date.
By buying a Pension Policy you will
- Have a tax dis-advantage
- Bear higher charges
- You will have lower returns
- Lesser liquidity among others.
Hence, before investing in a pure Pension Policy do go through the fine print.
The above comments are in general for providing tax incidence on a Pension Policy. However, there are many different structures of Pension Policies available. Speak to your Tax Advisor or Investment Advisor before taking a decision.
Happy & profitable saving.
Disclaimer: The opinion above, are as per the understanding of the Tax Laws, Compliances, & Circulars, supported by various Process Notes, Circulars and Case Laws and Years of experience of the Author. Please consult your Tax Advisor before taking any decision on this subject and article, because, the facts of each matter will be different and laws ‘may’ apply differently for each situation. The Article is just for a general explanation, to quell basic queries, doubts, the anxiety and rumours in the Cross Border community, including NRI’s, OCI, PIO’s, Expats, Seafarers, Professionals among others. Any loss or penalty or expenses of any nature whatsoever, will not be the liability of the Author or the Organisation.
Mr. Rohit Bajoria has more than two decades of experience in International & Cross Border Tax, NRI & Expat Tax, DTAA (Double Tax Avoidance), FEMA, Strategic Consulting, Asset Valuation, Accounting & Compliance, Banking & Financial Structuring, Cross Border Repatriation & Compliance among others. He has worked across the Country advising and assisting Global Clients, in various domains of Cross-Border Tax, Banking & Finance, across Industries in the MNC, Government & Non-Government segments.
He has gained a wealth of experience in International Tax & Compliance, Finance & Restructuring, Valuation, Credit Appraisals & other verticals in Tax, Compliance & Finance.
Currently, he is a Partner in Tax Assist (An Alfred Jordan initiative) and advises Clients located globally, on Cross Border Taxation & Compliance.
His other interests lie in writing articles in International & National Journals on Tax & Financial matters and he is working on a Book which is to be published soon. He frequently writes articles in Asean Affairs & other periodicals & magazines. He is actively involved with a few Orphanages and tries to support them actively. He can be reached on rohit@TaxAssist.in
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