If you are looking to secure a regular income on retirement, pension plans offered by insurance companies possibly offer the widest menu of choices. Market-linked investment options, various choices on the annuity and a favorable tax structure for such policies are some of the reasons why investors should consider them.
Here we tell you what options are available:
An investor has to be clear about three things before buying a pension policy - the age at which he wishes to retire (vesting age), the retirement corpus, i.e. the money needed post-retirement, and the premium he can manage to pay to build that corpus.
In a pension policy, the buyer pays a fixed premium till he reaches the vesting age. Based on one`s choice of investment (in case of a unit-linked plan, the insured is offered choices; in traditional plans the choice is not in the hands of the buyer of the policy), the insurer invests this fund to generate returns.
At the time of maturity of the policy, that is, when the buyer reaches the vesting age, he will be allowed to redeem as a lump sum (called commuting) one-third of the accumulated fund. The remaining fund balance has to be converted into an annuity or annual pension payment.
An annuity policy is a product by itself. One need not buy the annuity from the same insurer who sold the pension policy. Under an annuity contract, the insurer uses the lump sum amount paid by the buyer to pay him back a guaranteed sum at regular intervals till his death (or for a fixed period). Annuity plans guarantee a nominal return. Annuity rates (return) are reviewed every month by the insurers. But once an annuity is taken, the rate remains fixed. LIC offers annuity at 6.5%-7% per annum. ICICI Prudential Life Insurance, HDFC Standard Life and SBI Life also offer annuity (also called immediate annuity) products.
Options
Pension policies come with and without life cover. However, recent IRDA regulations require an insurance cover, to be implemented in future. Pension products that come with life cover charge additional premium.
For example, ICICI Pru Assure Pension, a unit-linked pension product, charges Rs 133 per lakh of sum assured annually as mortality charge. Kotak Retirement Income Plan Premium, a traditional pension policy, offers life cover and without life cover plans. The with-cover plan comes at a premium of Rs 9,750 per annum for a male of 35 years when the sum assured is Rs 3 lakh. The same policy without life cover will come for a premium of Rs 9,060 annually.
Pension policies also fall under-traditional and unit-linked groups. Traditional policies do not give full disclosure of their underlying investments; they predominantly invest in government bonds and very little in equities. Some of the traditional pension policy providers offer even vesting bonuses (in case of with-profit plans where the insurer shares his surplus).
Traditional policies fit a conservative investor`s portfolio well. Unit-linked pension products (ULPPs) invest in stock markets and also offer a combination of equity and debt portfolio. As regular ULIPs these products too have some charges and the investment risk, linked to the market, is borne by the policyholder.
Here we tell you what options are available:
An investor has to be clear about three things before buying a pension policy - the age at which he wishes to retire (vesting age), the retirement corpus, i.e. the money needed post-retirement, and the premium he can manage to pay to build that corpus.
In a pension policy, the buyer pays a fixed premium till he reaches the vesting age. Based on one`s choice of investment (in case of a unit-linked plan, the insured is offered choices; in traditional plans the choice is not in the hands of the buyer of the policy), the insurer invests this fund to generate returns.
At the time of maturity of the policy, that is, when the buyer reaches the vesting age, he will be allowed to redeem as a lump sum (called commuting) one-third of the accumulated fund. The remaining fund balance has to be converted into an annuity or annual pension payment.
An annuity policy is a product by itself. One need not buy the annuity from the same insurer who sold the pension policy. Under an annuity contract, the insurer uses the lump sum amount paid by the buyer to pay him back a guaranteed sum at regular intervals till his death (or for a fixed period). Annuity plans guarantee a nominal return. Annuity rates (return) are reviewed every month by the insurers. But once an annuity is taken, the rate remains fixed. LIC offers annuity at 6.5%-7% per annum. ICICI Prudential Life Insurance, HDFC Standard Life and SBI Life also offer annuity (also called immediate annuity) products.
Options
Pension policies come with and without life cover. However, recent IRDA regulations require an insurance cover, to be implemented in future. Pension products that come with life cover charge additional premium.
For example, ICICI Pru Assure Pension, a unit-linked pension product, charges Rs 133 per lakh of sum assured annually as mortality charge. Kotak Retirement Income Plan Premium, a traditional pension policy, offers life cover and without life cover plans. The with-cover plan comes at a premium of Rs 9,750 per annum for a male of 35 years when the sum assured is Rs 3 lakh. The same policy without life cover will come for a premium of Rs 9,060 annually.
Pension policies also fall under-traditional and unit-linked groups. Traditional policies do not give full disclosure of their underlying investments; they predominantly invest in government bonds and very little in equities. Some of the traditional pension policy providers offer even vesting bonuses (in case of with-profit plans where the insurer shares his surplus).
Traditional policies fit a conservative investor`s portfolio well. Unit-linked pension products (ULPPs) invest in stock markets and also offer a combination of equity and debt portfolio. As regular ULIPs these products too have some charges and the investment risk, linked to the market, is borne by the policyholder.
Insurers give a benefit illustration in the policy document stating the premium charges and fund value at maturity at an assumed rate of return.
Charges
Premium allocation, policy administration and fund management are the main heads under charges in an ULPP. Before subscribing to a unit-linked policy, do your homework to find out the charges across policies of different insurers. In some policies premium allocation charge is as high as even 100% (of the premium) in the first year. Higher the charges, lower will be your yield as lesser sum goes towards investment. The fund management charge is, however, capped at 1.35% by the IRDA.
Policies with life cover plans have mortality charge in addition to the above.
Some insurance agents have been pushing pension products to prospects on the argument that the product`s cost may rise once life cover is made mandatory. Do you need to rush in to buy a pension policy before the order comes into effect? Will the increase in premium cost be very significant?
Pension products do not offer strict comparisons to quantify the extra cost the buyer has to bear for life cover. However, it is not likely to be significant, especially for buyers of below 40 years.
In the series of regulatory changes that IRDA has been bringing on over the last few months, pension policies too have seen implications. They are: One, all unit-linked pension policies (ULPPs-pension plans that invest in equities) should compulsorily offer a life cover. Two, the unit-linked pension products will have a lock-in period of five years from the current three-year time period (traditional pension policies can continue with the current three-year lock-in). Three, partial withdrawals are not be allowed in ULPPs. The deadline for all of these was July 1. But it may be extended.
When life cover gets mandatory, one concern is that the elderly may be refused pension plans. But there are other options, says Andrew Cartwright, chief actuary, Kotak Life Insurance. ``Elderly clients will still have the option of buying an immediate annuity when they get to retirement.``
If pension is the goal then there are annuity products. If tax saving is the objective, there are products such as PPF, NSC.
A senior agent with LIC said that a mandatory life cover will save investors who had purchased unit-linked pension products from the risk of fall in the cover value when the market is down. ``For a ULPP buyer, there is always a risk of the fund value going down with the market. What if the death occurs in the period when the market is down? If life cover is combined, he will have some relief in the form of the sum assured.``
Currently, premium paid towards a pension policy (up to Rs 1 lakh) is allowed as deduction for tax purposes from the income. At the vesting age, one-third of the amount that is withdrawn is tax exempt; the remaining received as a pension through an annuity scheme is taxed as regular income. However, the revised Direct Taxes Code has brought annuity products under the EEE category.
If the DTC is implemented (it is proposed to be implemented from April 2011), pension policies will be treated on a par with endowment policies. Pension plans are, therefore, set to become attractive if the proposals in the Code are implemented.
Charges
Premium allocation, policy administration and fund management are the main heads under charges in an ULPP. Before subscribing to a unit-linked policy, do your homework to find out the charges across policies of different insurers. In some policies premium allocation charge is as high as even 100% (of the premium) in the first year. Higher the charges, lower will be your yield as lesser sum goes towards investment. The fund management charge is, however, capped at 1.35% by the IRDA.
Policies with life cover plans have mortality charge in addition to the above.
Some insurance agents have been pushing pension products to prospects on the argument that the product`s cost may rise once life cover is made mandatory. Do you need to rush in to buy a pension policy before the order comes into effect? Will the increase in premium cost be very significant?
Pension products do not offer strict comparisons to quantify the extra cost the buyer has to bear for life cover. However, it is not likely to be significant, especially for buyers of below 40 years.
In the series of regulatory changes that IRDA has been bringing on over the last few months, pension policies too have seen implications. They are: One, all unit-linked pension policies (ULPPs-pension plans that invest in equities) should compulsorily offer a life cover. Two, the unit-linked pension products will have a lock-in period of five years from the current three-year time period (traditional pension policies can continue with the current three-year lock-in). Three, partial withdrawals are not be allowed in ULPPs. The deadline for all of these was July 1. But it may be extended.
When life cover gets mandatory, one concern is that the elderly may be refused pension plans. But there are other options, says Andrew Cartwright, chief actuary, Kotak Life Insurance. ``Elderly clients will still have the option of buying an immediate annuity when they get to retirement.``
If pension is the goal then there are annuity products. If tax saving is the objective, there are products such as PPF, NSC.
A senior agent with LIC said that a mandatory life cover will save investors who had purchased unit-linked pension products from the risk of fall in the cover value when the market is down. ``For a ULPP buyer, there is always a risk of the fund value going down with the market. What if the death occurs in the period when the market is down? If life cover is combined, he will have some relief in the form of the sum assured.``
Currently, premium paid towards a pension policy (up to Rs 1 lakh) is allowed as deduction for tax purposes from the income. At the vesting age, one-third of the amount that is withdrawn is tax exempt; the remaining received as a pension through an annuity scheme is taxed as regular income. However, the revised Direct Taxes Code has brought annuity products under the EEE category.
If the DTC is implemented (it is proposed to be implemented from April 2011), pension policies will be treated on a par with endowment policies. Pension plans are, therefore, set to become attractive if the proposals in the Code are implemented.
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