Comparative analysis between pension plans and fixed deposit

Investing in pension plans and fixed deposits plays a crucial role in securing one’s financial future. With a diverse range of options available, individuals can choose from various pension plans and fixed deposits that suit their investment goals and risk appetite. Discussed here are the distinct type of pension plans available along with their features and benefits. Additionally, compared here are pension plans and fixed deposits, highlighting their key differences and advantages.

Distinct types of pension plans

Employees’ Provident Fund (EPF)

EPF is a mandatory savings scheme for salaried employees in India. Both the employee and employer contribute a certain percentage of the employee’s salary to the EPF account. The funds are invested in fixed-income instruments, providing long-term wealth creation and retirement benefits. EPF contributions qualify for tax benefits under Section 80C.

National Pension Scheme (NPS)

The National Pension Scheme is a government-backed retirement savings plan. It allows individuals to contribute regularly towards their pension account during their working years. NPS investments are managed by Pension Fund Managers (PFMs) and offer different asset allocation options to cater to varying risk preferences. Under Section 80C and 80CCD of the Income Tax Act, contributions to NPS are eligible for tax deductions.

Atal Pension Yojana (APY)

APY is a social security scheme initiated by the Government of India. It is designed to provide pension benefits for the unorganised sector, mainly focusing on individuals working in the lower-income bracket. APY offers guaranteed pension amounts based on the contribution amount and the age of the subscriber.

EPS or Employees’ Pension Scheme

EPS is an important pension program under the EPFO (Employees’ Provident Fund Organisation) that offers pension benefits to employees or staff covered under this scheme. The pension figure is computed depending on the average salary of the employee and the service years.

Pradhan Mantri Shram Yogi Maan-Dhan Yojana (PM-SYM)

PM-SYM is a voluntary pension scheme for unorganised workers, specifically those engaged in the unorganised sector. It ensures a monthly pension after attaining 60 years of age, depending on the contribution amount and age of entry.

Life insurance pension plans

Life insurance companies offer pension plans that combine life insurance coverage with a pension component. These life insurance plans allow individuals to build a corpus through regular premium payments and receive a regular income during retirement. Popular variants include immediate annuity plans and deferred annuity plans.

Senior Citizen Savings Scheme (SCSS)

SCSS is a government-sponsored savings scheme targeted at senior citizens. It offers a higher interest rate than regular fixed deposits and provides regular interest payouts.

Unit Linked Insurance Plans (ULIPs)

ULIPs are investment-cum-insurance products that provide market-linked returns. Some ULIPs offer an option to choose a pension plan rider, which allows policyholders to receive a regular income after retirement.

Voluntary Provident Fund (VPF)

VPF is an extension of the EPF scheme, allowing employees to contribute more than the mandatory percentage to their EPF account. The contribution additional made to VPS account assists in forming a bigger retirement fund.

Fixed deposits or FDs

FDs are instruments offered by financial institutions and banks, permitting you to put in a fixed investible for a particular time period. The deposited fund generates a fixed interest rate over the tenure of the investment. FDs are looked upon as a safe investment product as they provide huge capital protection and stable returns.

Retirement plans through a mutual fund

Specific mutual funds provide retirement plans designed to endow the long-term creation of wealth. Such plans often invest in a blend of debt and equity instruments with the aim to yield optimal returns for your retirement years.

What is the difference between pension plans and fixed deposits?

Risk

FDs are looked upon as low-risk instruments as they provide capital preservation features and assured returns.

Pension plans come with differing risk levels depending on the chosen investment products. Equity-related plans have higher market risks. On the other hand, debt-linked plans come with more stability.

Returns

Often pension plans have the potential to yield higher returns than fixed deposits, particularly those associated with market performance.

FDs offer an assured fixed interest rate, offering high stability but reduced returns than market-associated pension schemes or plans.

Tax benefits

Pension plan, such as NPS and EPF, offer tax benefits on contributions and withdrawals, subject to certain conditions.

Fixed deposits offer tax benefits on the interest earned, depending on the individual’s tax bracket.

Inflation hedge

Pension plans, especially those linked to market performance, have the potential to combat inflation and provide higher returns in the long run.

Fixed deposits, while providing stability, may struggle to keep up with inflation over an extended period.

Liquidity

Fixed deposits usually have a fixed tenure, and premature withdrawals may attract penalties.

Pension plans generally have a lock-in period, restricting immediate access to funds. However, some plans offer partial withdrawal or loan facilities under specific circumstances.

Retirement corpus management

Pension plans allow individuals to systematically build a retirement corpus over their working years.

Fixed deposits can be used as a part of retirement savings but may not offer the same level of systematic wealth creation.

Insurance coverage

Some pension plans provide life insurance coverage along with retirement benefits, offering additional financial security.

Fixed deposits do not provide insurance coverage.

Flexibility

Pension plans often offer flexibility in terms of investment options, asset allocation, and contribution amounts.

Fixed deposits have limited flexibility, with predetermined terms and interest rates set at the time of investment.

Government backing

Certain pension plans, like NPS and EPF, enjoy government backing, providing an added layer of security.

Fixed deposits offered by banks are insured up to Rs. 5 lakhs per depositor by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Market volatility

Pension plans linked to market performance may experience volatility, potentially impacting returns during certain periods.

Fixed deposits offer stable returns unaffected by market fluctuations.

Estate planning

Pension plans often provide options for nominees or beneficiaries to receive benefits in case of the policyholder’s demise.

Fixed deposits can also have nominees, allowing easy transmission of funds to the rightful heirs.

Investment horizon

Pension plans are specifically designed for long-term investment horizons, aligning with retirement goals.

Fixed deposits can be suitable for short to medium-term goals, as they offer flexibility in choosing investment tenures.

Personalisation

Pension plans offer customisation options, allowing individuals to align their investments with their risk appetite and financial goals.

FDs come with standard interest rates and conditions, limiting customisation options.

Post-retirement income

Pension plans offer a regular stream of income during retirement, offering financial stability.

On maturity FDs, offer lumpsum funds that can get reinvested or utilised for regular generation of income.

Contribution limit

FDs have zero contribution limit set, permitting you to invest according to your financial potential.

Pension plans come with a specific contribution limit based on the plan type and your income.

Conclusion

Investing in FDs and pension plans are imperative steps towards attaining financial stability. While pension schemes or plans provide the potential for generating higher returns as well as long-term creation of wealth, FDs offer capital preservation and stability. Thus, it is recommended to carefully factor in your financial goals, risk appetite level and investment time frame while selecting between FDs and pension plans. By making a well-informed investment decision, you can ensure a financially secure and comfortable retirement life while making the most out of the benefits of life insurance policies where applicable.