Financial Health Check

I am 47 will I have to pay tax on this when my policy matures when I am 60? How much tax is that? If an endowment is tax-free, is it not better to buy that instead of a policy that will be taxed?
S. Ravikant, Pune

You have asked a very relevant question. In fact, this is one of the biggest mistakes being made by the people today. Retirement planning is mired in many myths and misconceptions. Most people, when they think of retirement planning, automatically choose a plan labelled by the insurer as a pension plan and end up putting high amounts in it every year to get a lump sum and pension on retirement without realising that this is not the most tax effective way of saving. The fact is that in a pension plan only the commutation value lump sum of between 20 per cent to 33 per cent of the policy amount is tax free and the rest of the pension is taxable. The best way would have been to buy a pension plan for Rs 10,000 per annum to take advantage of the exemption under Section 80 CCC 1. With this tax benefit they would get an excellent return which no life insurance plan will be able to beat. But in case they want to invest any further amount towards retirement, they should choose a life insurance plan rather than a pension plan as it would not only offer them tax saving now under Section 88, if unutilised, but the complete corpus on maturity would also be tax free and they would have the option at retirement to invest into a mutual fund8217;s systematic withdrawal plan or life insurance company8217;s annuity scheme offering guaranteed taxable pension as per their need. There is a major fallacy that if you buy a pension plan now you will get annuity pension at present rates. You will only get rates prevailing at that time so it is better to use a life insurance plan as it will offer you more tax effective returns and flexibility when you retire.

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