Pension Plans - Are they worth investing in?

I shall get straight to the point - I have not bought a pension plan. (Yes, I don't have one in spite of the ad which screams 'Get 1.5 crore pension on your 55th birthday'). And why do I not have a pension plan? It is not that I think that I can invest better than a pension fund manager (though honestly I can show you later why it isn't too difficult to beat the returns of a pension fund). The simple reason is that you have got a large number of options which could beat any pension fund hands down any day.

A Pension Plan is simply a plan, or a product, that promises you a pension i.e. a fixed regular income after you retire, for a certain period of time. These products are offered by life insurance companies to help individuals build up a retirement corpus. You invest in the pension plan by paying a regular premium. Your premium is invested (after deducting certain charges) into a safe fixed income product. When you retire, your invested premiums which have grown to a certain amount, are invested in an annuity scheme, from which you draw down certain income on a regular basis. You can choose to receive your annuity payment either monthly, quarterly, half yearly, or yearly - these options are offered by most insurance companies. 

Pension plans are easy! They are structured in a simple way: you invest your premium and can essentially forget about it until you retire. They also offer death benefit, so if the policyholder passes away before the plan matures, the beneficiaries receive a lump sum or annuity payout, depending on the options offered by the company and chosen at the time of taking the policy.

Why do I not invest in Pension Plans?

Simple answer - Because of very low returns. Most insurance companies will tell you that the premiums you pay will get invested into a safe product and will generate a rate of 6% or 7% (typically somewhere in this range) on an annual basis, growing 'slowly and steadily' until your premium term finishes and you retire. Is this return enough per annum return for such a long term product? No!

Conventional pension plans will invest into very safe instruments, such as bonds and government securities. The returns on these almost-zero-risk products is much lower (7.25% to 8% per annum) than the return on equity (12% plus over the long term). once you factor in inflation of 7% per annum. And you are effectively only earning 5% per annum net of charges, but cost of living is rising by 7% per annum, so you are essentially losing money!

What are my alternatives?

If you are in your 30s or 40s, and you have more than 20 years to go for your retirement, invest your retirement investments into a mix of equity, debt and gold, in the ratio of 70-75% in equity, 10 - 15% in debt and the remaining in gold. If you are nearing your retirement, i.e. you are already in your 50s and have less than 7-8 years to retire, invest up to 60% into debt such as debt mutual funds and high yielding but safe corporate bonds, keep 10-15% in gold, and the remaining small portion into equity to give your portfolio a boost. 

If you do not already have a pension plan, politely ask the pension plan sales man from the insurance company to leave. Do not be taken in by his colorful PowerPoint presentation with fancy tables showing - 'potential/projected returns'.