InvestorQ : What are the disadvantages of pension plans?
priya Shah made post

What are the disadvantages of pension plans?

3 years ago

Retirement is one of the key stages of life and one that most of us will have to go through. It is inevitable. Retirement is a time when a person’s earning will stop, but the bills unfortunately don’t. Hence, it is something that every individual should think about in their prime.

A pension plan helps an individual sustain his/her lifestyle even after the pay checks stop coming. These plans help an individual allocate some part of his/her savings to accumulate money and over a period of time, these funds offer you with steady income post your retirement.

While it is financial tool that allows you to start working towards a bright future, there are a few disadvantages to it as well:

a. Limited deduction allowed

Though pension plans qualify you to a tax deduction, the maximum allowed deduction on life insurance premiums is Rs. 1 lakh under the Income Tax Act.

b. Annuity is taxed

When you receive the annuity after your retirement, it gets taxed under Income Tax Act. Hence, it is of utmost importance that you

c. High returns require high-risk taking

In order to make sure that the pay-out at the time of your retirement is adequate, you might have to seek high-risk options to obtain higher returns. This is because the traditional non-risky investment options may not be enough to override the effects of inflation.

d. Early bird catches the worm

If you are not an early investor, then a pension plan option may be a little late for you. This is because the earlier you invest, the more time you allow your corpus to grow. Thus, a person who starts a pension plan at the age of 21, is going to benefit from a substantially larger return than a person who starts his/her pension plan at 30 years of age.