Mohan Shah's father Prakash retired last year from Central Bank of India. During his 29 years of service, he failed to opt for any pension scheme.

And being the sole earning member, Prakash retired with little savings. The little that was there in his bank account was used up last December to pay for his second daughter's wedding.

Today, he and his wife live with Mohan and are forced to rely on their children for financial support. But for how long?

Having turned 60 last month, and looking at the mortality tables, Mohan's father has probably another 15 to 20 years left. Added to daily expenses, in January this year, Mohan's mother was diagnosed with diabetes and has to take insulin regularly.

This means medical expenses for Mohan. Health and medical costs have increased manifold and will quadruple over the next 10 years. This is an additional expense for Mohan, as doctor's visits become a regular feature as one ages.

It's not just medical costs alone. Even daily expenses like food, petrol and transportation end up costing more. A kilo of potatoes used to cost just Rs 1.50 some time back.

Today, a kilo costs Rs 8, and if inflation rises at the annual rate of five to six per cent, 10 years from now potatoes could cost Rs 43 a kilo!

Petrol prices have equally shot up from Rs 17 a litre 10 years back to Rs 34-35 plus today, and could well rise to Rs 60 a litre 10 years from now.

Enter pension, to reduce tension. Pension is all about insuring oneself financially against the risk of living too long. It is about fund management, long-term savings, protection and annuity income.

Moreover, investment in pension plans offers taxpayers a direct tax deduction of Rs 10,000 from one's taxable income under Section 80 CCC (1) of the Income Tax Act.

Unlike Section 88, the tax benefits under this section are available to persons in all income brackets.

Even for those eligible to save tax under Section 88, the saving on an investment of Rs 10,000 is higher in the case of pension plans.

The tax saved is Rs 3,150, whereas under Section 88 a Rs 10,000 investment yields a maximum tax rebate of Rs 2,000.

However, one doesn't invest in pension schemes only for tax savings.

Considering the high cost of living and falling interest rates, people ought to be saving far more than Rs 10,000 a year if they wish to retain their present lifestyles. Take the Life Insurance Corporation's Jeevan Suraksha pension plan.

A 30-year-old paying Rs 10,238 every year for a term of 20 years will be entitled to a pension of just Rs 14,200 per month on retiring at the age of 50.

LIC assumes an annual bonus rate of Rs 65 per Rs 1,000. This is purely an illustration, which could vary depending on interest rates and investment strategies.

A pension plan also allows a policyholder to withdraw a certain percentage of the accumulated funds on retirement to take care of some large expenses.

Most of the private players - ICICI Prudential, HDFC Standard Life, Tata AIG and Aviva Life - have followed in the LIC's footsteps and offer a maximum withdrawal of 25 per cent of the accumulated corpus at the time of retirement.

OM Kotak Mahindra Life is the only one to offer a maximum withdrawal of 33 per cent of the accumulated amount.

After withdrawal, policyholders have to buy an annuity plan from the balance amount that will provide them with a monthly pension till they bid a final goodbye.

By taking an open market option, customers can, on maturity, buy an annuity product from any life insurance company.

Should a policyholder die within the accumulating period, most life insurers return premium with interest, subject to a maximum of sum assured, plus accumulated bonuses to date, say officials with HDFC Standard Life.

It is not easy to decide today how much annuity one should take 20 years later. That's a decision best left to be made at the time of retirement.

Customers can choose from various annuity options available, including options like annuity for husband and wife, annuity with annual increment, annuity with return of purchase price and more.

During the accumulation phase, a customer can only decide how much he/she can contribute and afford to put aside for post-retirement needs, says Tata AIG Life Insurance Company managing director Ian Watts.

Looking at the inflation rate and increasing post-retirement costs in terms of healthcare needs, this means one should ideally save longer and more if one wishes to preserve one's existing lifestyle.

A few ballpark numbers will help you figure out how much you should save in your circumstances.

If you save Rs 10,000 every year for a period of 30 years under LIC's Jeevan Suraksha, you can expect a pension of Rs 9,290 per month on retirement after withdrawing Rs 3.93 lakh on retirement.

Should you not opt to withdraw a part of the accumulated corpus, you can expect a monthly pension of Rs 12,388 based on LIC's current indicative calculations.

A lot, however, depends on interest rates at the point of retirement. A warning is in order, though: The incentive to save more than Rs 10,000 is low because the balance has to come from post-tax income.

On the other hand, if you do save more and entitle yourself to higher pension, that pension income will be taxed again as normal income. So, it's a double whammy -- double taxation of pension savings and pension income.

Yet, Mohan, learning from his father's failure to save for post-retirement life, signed his first pay cheque away towards the purchase of an ICICI Prudential pension plan.

He plans to religiously put aside Rs 20,000 every year to get himself a worthwhile pension and in the hope that the government will increase the tax deduction in the years to come.

Meanwhile, his life gets covered during the savings/ accumulation period. ICICI Prudential also offers a health cover and guarantees capital protection during the accumulation phase.

To be sure, pension plans are not the only available instruments in the market today for long-term savings. During the accumulation phase, one could opt for mutual funds, the government's tax-free bonds, the public provident fund, or government securities.

But there is no tax exemption or inherent life cover in mutual funds; in the case of PPF, you get section 88 benefits for incomes up to Rs 5 lakh, but not above. The interest is, however, tax-free.

Some infrastructure bonds also offer Section 88 benefits.

How much pension?

In retirement planning, one needs to calculate backward to figure out how much one should invest - with or without tax breaks.

First, ask yourself when you wish to retire. Then, what kind of income do you need to maintain your present standard of living.

If you think you need Rs 10,000 a month (pre-tax) if you were to retire today, assuming a six per cent inflation rate, you would need Rs 17,908 after 10 years, Rs 23,965 after 15, and Rs 32,071 after 20 years.

If you assume a more benign inflation rate of, say, four per cent, the required amounts would be Rs 14,802, Rs 18,009 and Rs 21,911 after 10, 15 and 20 years of saving.

You will then need to talk to your pension plan advisor and figure out what you need to put away every year to achieve your targeted pension income.

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