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Are pension products good for retirement?

By Suresh Sadagopan
September 27, 2010 12:54 IST
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Mindshare is an important aspect of marketing. The right positioning of the company, its brands, products and other intangible assets is extremely critical to the success of the enterprise.

Positioning: The battle for your mind, a seminal book by Jack Trout and Al Ries, was a runaway hit in the 1980s. It gave an insight on how marketers should get into the mind of the consumer and sculpt a desirable image of their brand.

Sometimes, the associations created are so strong that a category itself is identified with a brand, like Xerox. The branding proved good in the photocopying business but worked against the company in other areas.

Sometimes, the association with a brand is so strong that no other brand is able to penetrate the market. In financial services category too, there are several carefully cultivated niche areas for instance the retirement planning space.

Thanks to the age-old association of pension with old age, retirement and pension became synonymous, among people. This was a ready, fecund environment, which the life insurance companies, mainly, have latched on to.

They understood the association and milked it for what it was worth.

So, are pension products good for retirement? Sure. But are they the only way to take care of retirement planning? Hardly. Retirement planning is a much wider area, where pension products are only one of the options.

Also used for retirement planning are  provident  fund (PF), gratuity and other retiral benefits that one gets. Apart from that, one's investments in various areas like fixed deposits (FDs), bonds, equity, mutual funds (MFs), property and so on will help in retirement.

In fact, pension products, till date (till the proposed new version of direct taxes code gets implemented), have a huge disadvantage. The annuities are taxable as income, which depresses the returns.

Once the pension starts, one cannot access the corpus, making the product inflexible. Compared to pension products, many other products, notably equity and equity-oriented MFs give better tax-free returns.

They are also flexible on accessing the corpus. So, why do individuals who have bought a pension product consider it enough for their retirement planning?

Losing Rationality

Thought processes are very difficult to change. Besides most people have little interest in financial matters .The general tendency is to get over with finance-related decisions as soon as possible.

The other reason is the tendency to replicate what a friend, colleague or well-wisher may have done. If an acquaintance has bought a pension plan, so would they. Others may invest in an FD, tax savings scheme, insurance simply because their peers advised them to. This, without giving any thought to whether the investment is really relevant for their situation.

Another goal targeted successfully by financial services companies is child education and future planning. Emotional strings are pulled here, to good effect. You see advertisements depicting a father holding his kid, and the kid spreading his hands, indicating probably what he will become - a pilot.

The cue to the parent is to save and promote the child's ambition. There are umpteen variations of these advertisements, all very heart rendering.  Insurance companies have won this space for themselves, hands down.

There are many parents who want secure their child's future through specific children's insurance plan, a savings plan or gold schemes advertised in the media.

People tend to think of such insurance products as the primary tool to achieve their children-related goals. As a matter of fact, the security a child plan affords can easily be bettered by a simple term plan.

The investments for the child can be done in a basket of products, which will help build the corpus required to fund the goals, be it education, marriage and so on. While an insurance product might be one solution, it need not be the only solution or even the best one.

But investing in a plan evocatively called 'Little Angels' or 'Clever Geniuses' or some such thing is somehow more appealing than investing in bland products like FDs, bonds or MFs.

Financial services and products are rarely evaluated rationally and thoroughly before a decision is taken. There is a small minority who evaluate products that are advertised and ask their financial planners all the right questions before they take a decision.

Homing Out

Having a roof over one's head is a basic need. But for most people looking to buy property, buying a home is always an emotional decision (except for an investor). A home is bought in one city even though the person has been switching jobs every two-three years and not necessarily in the same city.

The decision to buy a house is based on the "look and feel" of the property and not the price alone. Most people justify the price and other parameters quoting their tax savings, the rent saved, avoidance of the inconvenience of frequent shifts and so on.

The calculations would mostly prove otherwise. They forget the long-term liability they are assuming and keep talking of the asset they are creating. The builders have realised that price is not really a factor in decision making these days. Most are looking at a certain élan and an have-arrived-look to their property. Which is what the builders give them.

Al Ries would be extremely pleased with most of the financial services players today, for understanding the positioning concept and creating a hugely successful industry, in the process.

The writer is a certified financial planner.

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Suresh Sadagopan
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