I am saving well, do I still opt for a pension plan?

A lifetime of diligent saving v/s investing in a pension plan…which one is a better idea? We examine the issue.

A person earning an income has a set path to follow: work for a certain number of years, create enough savings in the bank so that no unexpected jolts can shake you, fulfil all familial obligations and then retire. Of these, the savings step is often an ambiguous one. While most people are able to save enough money to hold them in good stead in the future, several others are not able to do so.

Those who save diligently do not feel the need to make too many investments. Of the investment options available, pension plans find less favour among most people. Most investments are geared towards health and life insurance policies, mutual funds, Government securities etc.

However, pension plans are essential to ensure that one has a stable retirement. We do not underline the importance of a peaceful retirement enough, and it is considered surprising for young people to invest in pension plans. The biggest argument against buying pension plans is: ‘I am saving money every month. I will have enough money by the time I retire. Why do I need to invest in a pension plan?’

Consider this: Suppose you save Rs 5,000 per month from the age of 30. Till the time you retire at age 60, you will have accumulated Rs 5,000 x 12 months x 30 years = Rs 18,00,000. This is a handsome sum of money by any means. Now consider any incidental expenses you will have along the way till you retire. Your children will decide to study abroad, you will give them lavish weddings, you or your spouse might require medical treatment, you might feel the need to buy another house. In the face of these expenses, do you have another source of finance? If not, you will be forced to break into your savings.

However, pension plans work as an insurance policy with benefits distributed to the policy holder on the age of retirement. You cannot withdraw the invested money from the plan, nor can you get the benefits of the plan until you retire. This means that you must necessarily invest in the plan for a number of years — in the meantime, you can finance your other life goals through other investments and your regular income. Once you retire, your pension policy can ensure financial stability for you and your spouse.

Saving money by yourself every day leaves a lot to chance, but saving via a pension scheme is a guaranteed way to get returns when you need them the most.