Pension Plan vs Retirement Plan: What is the difference? Which is a better option?

When it comes to securing your financial future, the best idea is to start early. Planning for retirement means making investments in such a manner that you have a sizable corpus fund by the time you reach retirement age. If you want to start planning for your finances, there are two broad options you have- pension plans and retirement plans.

While pension plans and retirement plans may seem quite similar but in terms of benefits, features and flexibility both investment options come with some major differences.  

Here’s a detailed look at pension and retirement plans. Knowing all the key factors about both the investment avenues could help you for better retirement planning.

What are retirement plans?

Retirement plans enable an individual to invest a portion of their salary into a fund which is a mix of debt, equity and other assets. The benefits of the fund will be available after attaining the retirement age. There could be penalties for premature withdrawals.

What are pension plans?

Pension plans allow a person to make investments at regular intervals while working and build a fund that can be used post-retirement for getting regular pension. The company also contributes on behalf of the employee for a few government backed pension schemes. The accumulated corpus can help you beat inflation and keep your finances secure even after retirement. The National Pension Scheme is one of the most availed pension schemes. Many banks and life insurance companies also offer annuity plans that allow regular pension after retirement.

Pension Plan vs Retirement Plan: Key differences

Monthly payments: While pension plans provide payments each month after retirement, the same is not true for retirement plans.

Flexibility: A retirement plan is more flexible than a pension plan and allows investors to choose how much they want to put into their funds. Pension plans cannot be changed once you start investing.

Risk: Pension plans are normally risk-averse investments. For retirement plans, the risk is dependent on the assets chosen by the investor. If a larger amount of the savings has been put in equities, the risk of losses could be higher. A balanced or diversified portfolio is ideal to minimise risk.

Tax benefits: Retirement plans may not offer tax benefits if the investment is in mutual funds only. The investment may be seen as a long-term capital asset and Captial Gains tax will be applicable at the prescribed rate. On the other hand, pension plans offer up to Rs 1.5 lakh in exemptions under Section 80C of the Income Tax Act.

Pension Plan vs Retirement Plan: Which is better for you?

The choice depends on the goal of the investor. If there is a need for monthly payments, pension plans could be a better idea. If the goal is to have flexibility and a lump sum amount at your old age, then retirement plans could be suitable.