Worried for retirement fund creation?Mutual fund or pension plan?Which one to choose? Mutual Funds or Pension Plan–Which one to choose as an option for retirement fund creation.Very often I receive this question from many of my seniors,colleagues, friends and my blog readers.So, today I have decided to come up with a detailed analysis on a very serious topic i.e. Retirement Planning.I am giving the needs of Retirement planning link below for easy reference. Are you retiring soon?Have you planned for your retirement yet? As I wrote earlier that we, the Indians are really very poor in making a sound retirement plan.Majority of salaried persons due to non planning for retirement have to compromise with post retirement life.Lack of financial planning and understanding sometimes force them to withdraw money from their one and only retirement fund i.e. Provident Fund.Rather this fund should be kept intact for sunset years but maximum salaried class people tend to withdraw it either for child’s marriage,education or for buying a house for their children as well. Retirement and pension plan are synonymous terms.Once we are thinking for a retirement plan, we tend to go for pension plans. There are numerous pension plans in India but are they really best suited for you?Have you ever questioned yourself , have you ever checked the returns of the pension plans.I think for most of people the answer will be a big “No”. While planning for retirement we must keep in mind that it goes through two phases viz; 1.Accumulation phase and 2.Distribution phase. Phases of retirement planning Retirement planning phases Accumulation phase: During this phase the investor invests regularly over a long period of time for retirement; Distribution phase: During this phase the investor starts receiving regular income, which may be on monthly,quarterly,semi annually or annually basis.This income payout is based upon the accumulated value when payments begin. Based upon risk profile,age of the investor and time horizon of the investment ,an investment can be classified as below: Age Bracket Investment Risk Profile Under 30 years Aggressive 30 to 40 years Moderately Aggressive 40 to 50 years Balanced 50 to 60 years Moderately Conservative Above 60 years Conservative More closer to retirement, investments should automatically be moved to a lesser risk portfolio.This is the standard principle of retirement planning which must be adhered to strictly. Pension Plan or Mutual Fund? Which one to choose? Pension Plans as a tool for retirement plan In pension plans a person pays regular premium till his retirement and then receives regular payment from the accumulated corpus as pension or annuity.Retirement plans or Pension Plans are primarily investment plans in which an individual invests till he retires and start receiving pension once he retires.Also, there is a provision to withdraw 1/3rd of the total accumulated corpus once he has retired to meet other financial goals and balance amount can be received as pension. Pension plans offered by insurance companies help individuals to build a retirement corpus.On maturity this corpus is invested for generating a series of regular income which is referred to as pension or annuity.Conventional pension plans invest a major portion of the premium in Bonds and Government Securities.If inflation rate @5%-6% is taken into consideration , the real return from this investments really look very unimpressive.Since, there is no exposure(except Unit linked pension plans) to equities and the income is guaranteed , the return from investment is quite obvious to be low. Currently there are various Unit Linked pension plans offered by insurance companies.The intention is to build an unlimited corpus, but their downside capital is not protected and you may end up losing your capital.Also, no withdrawals are permitted during accumulation phase.Though Capital protection plans are there to provide highest NAV guaranteed plans, but they do lose their shine due to higher charges.Pension plans are not very tax efficient.The pension received is taxable in the hands of the investors as per the applicable income slab. Mutual Funds as a tool for retirement plan On the other hand Mutual Funds are very tax efficient.After the Budget 2018, with introduction of 10% LTCG on Mutual Funds, still they are very suitable product for retirement purpose.Also, the income accumulated upto the grandfathered date 31st January 2018 is tax free.The income generated from mutual funds over and above ?1 Lakh is chargeable to LTCG @10%.Still this is a safe bet and more tax efficient as compared to pension plans.There is no hidden charges or high administrative charges unlike conventional or Unit linked pension plans. Investments in MF can be done as per the individual’s own choice.The early you start ,with the power of compounding there is a possibility to build a huge corpus for retirement.As one can choose even 100% exposure to equity and investment is made for a very longer time horizon ,this can even fetch you more than your expected corpus. It should be kept in mind that while investing in MF for retirement purpose, the risk profile,age and investment period can play a significant role during the accumulation phase.So,the nearer is the retirement time,money should be withdrawn and kept in safer or less risky instruments gradually.Once the individual attains retirement age, he can choose one of the following option to get monthly pay outs. Pension option: Receive regular income till perpetuity and leave the accumulated investment in the fund; Lump sum option:Withdrawal of full value and invest as per own choice; Combination option:Withdraw a partial option and continue to receive monthly pay outs from the remaining corpus; Flexible option:Set a fixed amount per month for a certain period.This involves receiving both accumulated principal and ongoing dividends over a period of time. Final Word Mutual funds as retirement plan are a very good option for investors who seek to plan for their golden years.I personally, suggest Mutual Funds over Pension plans due to wide variety or range of products managed by professional experts, diversified portfolios,low cost products,liquidity,transparency,no hidden charges and full watch by a strong regulator SEBI