Today it has become common place for insurance companies to target unsuspecting customers with their pension plans. However not many of these gullible customers know that pension plans from insurance companies. Here is why.

• While your investment fetches you tax deduction, you end up paying tax on the amount you receive as the pension.
• High charges means just a small portion of your money actually invested.
• You cannot withdraw the money even if your investment performs poorly.

So how should you invest your money to build a sizeable nest egg for retirement?

Here are some tips.

• Diversify your investments across PPF, bank FDs, debt and equity mutual funds initially. Then as you near retirement age, transfer your equity investments to debt instruments for capital safety and to get regular income. Start by invesing 80% of your portfolio in equities, then make it 50% when you reach mid-40s and then keep 20% in equities when you are a couple of years away from retirement.
• If possible, invest in a property to get a good rental income after retirement.
• But under no circumstances should you touch these funds. This is particularly true for equity funds, which will give you compounded annual growth rate of at least 15%.
• While safety of your capital, don’t shy away from taking some risks. Invest in companies like Tata companies, HDFC and Infy to get good returns on your capital without risking your capital.

In the budget of 2009, government of India has introduced NPS or National Pension Scheme. This scheme is available in certain banks and post offices throughout the country. It lets you invest your money in equity, debt and government securities. You can invest your money in accordance with your risk appetite. The investment will be managed by fund managers, who will charge a nominal fee for the same.

You can withdraw your money in the form of pension once you reach the age of 60. You can claim tax benefits on the sum invested. The minimum amount you can invest is Rs. 500 per month. Once you reach the age of 60, you can withdraw 40% of the sum invested to buy annuity though a life insurance company to get your monthly income.

However there are 2 drawbacks to this scheme. For one, while investment helps you save tax, you will end up paying tax on the returns at the time of withdrawals. This will reduce your returns and is an important factor during your retirement when you don’t have any source of income. Also the charges for managing the fund are quite high. For opening an account you pay Rs. 50, Rs. 350 for annual maintenance charge, Rs 10 for each transaction and   0.0009% per year of the fund value as the fund management charges. So effectively you pay more than Rs 500 towards the charges. This is quite expensive.

Hence it would be advisable to avoid NPS. Instead stick to mutual funds that have managed to offer consistent returns. As you near retirement, withdraw your investment and invest it in a bank fd. You’ll save on taxes as well as charges.