National Pension Scheme and unit-linked insurance plans come to mind whenever individuals plan to save money for retirement. However, choosing between NPS and ULIP often becomes hard for first-time insurance plan buyers since they aren’t sure how to differentiate between them.
When choosing between the National Pension System (NPS) and Unit Linked Insurance Plan (ULIP), there are several factors to consider. These factors will help you align the choice with your financial goals, risk appetite, and investment horizon. That’s why we decided to list out all the major differences between NPS and ULIP.
In this article, Aapka Policywala – trusted for buying pension plans online in India – will share everything about the National Pension Plan (NPS) and unit-linked pension plan (ULIP). Let’s start!
NPS vs. ULIP: Meaning
The National Pension Scheme (NPS) is a government pension scheme for employees working in the private, government, public, and unorganized sectors. However, people serving in the armed forces cannot invest in the National Pension Scheme.
Unit-linked pension plans offer investors both insurance and investment opportunities. ULIPs are known for their flexibility, transparency, and the ability to switch between investment options. The objective of unit-linked pension plans is to offer the opportunity for wealth growth alongside insurance coverage.
NPS provides a mix of equity, debt, and government securities to generate returns over the long term. It aims to provide financial security after retirement and is also known for its low-cost structure and tax benefits.
Under unit-linked pension plans, a portion of the premium paid goes toward insurance coverage, and the remaining amount is invested in funds of your choice such as equity, debt, or balance funds.
NPS and ULIP: Major highlights
Below are the major features of a National Pension Scheme and unit-linked pension plans:
- The National Pension Scheme allows you to choose your pension fund manager, contribution amount, investment pattern, and more. There are no strict criteria for investing in NPS. ULIP on the other hand allows investors to choose how much of their investment should go into equities and what portion should go into life insurance.
- NPS is a voluntary scheme for all citizens of India. You can invest any amount in your National Pension Scheme account at any time. Unit-linked pension plans however have a 5 year lock-in duration. The investors will be fined a penalty if they redeem their money before the 5-year term has passed.
- One of the major features of NPS is tax saving which attracts many investors. For ULIP, tax breaks on paid insurance premiums are available in the Income Tax Act 1961 under Section 80C.
- The national pension scheme holders can transfer their superannuation funds to their NPS account without any tax implication. However, it requires post-approval from relevant authorities.
- Due to the sheer flexibility that the unit-linked pension plan investment provides, long-term ULIP returns are often highly promising.
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NPS vs. ULIP: Comparison
Choosing between NPS and ULIP depends on many factors and below are some of them:
Retirement Planning
- NPS is better for retirement planning as it is designed to accumulate a retirement corpus with long-term savings and tax benefits.
- ULIP can be used for retirement planning but it is not focused on it. It comes with a higher risk and charges but ULIP is more versatile with the potential for higher returns.
Wealth Creation
- NPS is a stable but slower wealth-creation tool. It provides moderate returns with a balanced exposure to equity and debt.
- ULIP is suitable for aggressive wealth creation for investors with a higher risk appetite. There is potential for higher returns due to equity investments.
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Investment flexibility
- NPS offers limited flexibility in terms of fund switching. It offers Active Choice and Auto Choice options for asset allocation.
- ULIP offers high flexibility with the ability to switch between different funds as per market conditions and personal preferences.
Investment horizon
- NPS is a long-term investment until retirement. It is suitable for individuals looking for disciplined retirement savings.
- ULIP can be tailored to medium to long-term goals. It is suitable for people with varied financial goals beyond retirement.
Cost structure
- The National Pension Scheme is a low-cost structure with minimal charges. It is ideal for cost-conscious investors.
- ULIP demands higher charges including premium allocation, fund management, policy administration, and mortality charges. It is suitable for investors who are willing to pay higher costs.
Liquidity
- NPS allows partial withdrawals under specific conditions and low liquidity with restrictions on withdrawals until retirement.
- ULIP allows partial withdrawals and provides better access to funds. Investors get higher liquidity after a 5-year lock-in period.
Risk appetite
- NPS is suitable for conservative to moderate risk takers. It offers a balanced exposure to equity and debt.
- The unit-linked pension plan is suitable for moderate to high-risk takers. It offers the option to invest heavily in equities for higher returns.
We hope that the difference between the National Pension Scheme (NPS) and the unit-linked pension plan (ULIP) is pretty clear now! In case it isn’t and you are still confused about which one is best for you, here is a quick breakdown of both retirement options.
Buy a National Pension Scheme (NPS) if:
- Your primary goal is retirement planning.
- You want a low-cost investment with moderate returns.
- You have a low to moderate risk appetite.
- You are looking for specific tax benefits aimed at retirement savings.
Buy a Unit-linked pension plan (ULIP) if:
- You are looking for life insurance with investment options.
- You have a medium to long-term investment horizon with varied financial goals.
- You are comfortable with higher charges for potentially higher returns.
- You have a moderate to high-risk appetite and want flexibility in fund switching.
NPS vs. ULIP: Invest Wisely
We hope that the above article helped you learn about the difference between the National Pension Scheme and the unit-linked pension plan. The choice between NPS and ULIP depends on your financial goals, risk tolerance, and investment strategy.
Got any queries to ask? Please email us at info@aapkapolicywala.com so our pension experts can answer them. We are also home to some of India’s best insurance service providers and bring the best plans from them.
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