Rising average life expectancy and cost of living have seen Indians flocking to pension plans. Here are few tips to help pick the right plan.

A chief executive officer of a leading insurance company had an interesting thing to say on pension plans: "The pension plan of Indians until two years ago was to give birth to a maximum number of sons. The hope was at least one would take care of the aged parents in their golden years." This school of thought has been challenged with the breakdown of the joint family system. "Indians rarely think they need to bear their retirement costs, nor do they expect the government to play a role. Most Indians feel that their children will bear their retirement costs. But falling fertility rates are resulting in smaller families. The growing stress of mobility in work force is impacting the joint family system and informal support systems are crumbling," says Aviva India managing director Bert Paterson.

According to an all-India survey done by the Invest India Economic Foundation, less than a sixth of those about to retire, around 113 million by 2016, are covered by some form of pension. Pension plans are one such investment-cum-saving option offered by most insurers for your golden years. In such plans, you pay a fixed premium over certain tenure, which is the term of the policy. Then the net premium, after all the deductions, is invested by the insurer in various instruments, depending on the type of plan.

Pension plans available today

There are two kinds of plans - endowment and unit-linked. Endowment plans invest your money in fixed income products. So you may find the returns low, although safe, after discounting the inflation. The other variant is ULIPs, which invests the corpus in stock markets, balanced funds, etc. Then comes the 'with cover' and 'without cover' plans. The 'with cover' pension plans, as the name suggests, comes with a life cover that takes care of any untimely demise.

The most commonly available plan today is the 'deferred annuity' plans. In these plans, the pension does not begin immediately. You can defer it up to a period of your choice. Let us assume you buy a pension plan with a tenure of 25 years. Then your annuity/pension will begin after 25 years from the effective date of your policy. Apart from that, you also have the option of deferring your vesting age. Suppose you have opted for a pension plan, in which the annuity would start from the time you turn 45. But if you plan to work for another five years, then you can defer your vesting age to 50, says Pranav Mishra, senior vice-president & head of products, ICICI Prudential Life Insurance.

Start Early

It is also advisable to start investing early. That will help you save a significant corpus for future. There is certain cost attached to your postponement of investment. If one delays buying a life insurance policy even by five years, the premium goes up.

Flex it

Another point check is to ensure that the plan offers flexibility so that it fits the customer's needs as they change. The trend is to opt for a ULIP pension plan with a fixed allocation strategy.

Know the charges

Every pension policy comes at a cost. Briefly, you have a fund management charge, policy administration charge, premium allocation charge and switching charge. A switching charge, however, is applicable only after you cross the switching limit available in every policy. According to industry estimates, the policy administration charge is anywhere between 0.20% and 0.50% of the premium. It depends upon the frequency of the premium and the premium amount.