Which is a better: Unit-linked pension plan or National Pension System?
Following a lull of almost two years, insurance companies have
resurrected the unit-linked pension plan. These had vanished from
the market after regulatory changes were introduced in August 2011.
Following a lull of almost two years, insurance companies have resurrected the unit-linked pension plan (ULPP). These had vanished from the market after regulatory changes were introduced in August 2011, which required a guarantee of at least 4.5 per cent return on investment. Insurers called it a non-viable proposition.
However, the industry could not ignore the product forever; these once accounted for 20-25 per cent of their business. So, after extended negotiations, the regulator scrapped the guaranteed return criteria.
As per the revised rules, a pension policy had to assure capital protection (meaning no loss, no gain). A few companies have relaunched the product after the guidelines were changed. Currently, HDFC Life, ICICI Prudential and Birla Sun Life offer ULPPs.
Customer response has been encouraging. HDFC Life has had first-mover advantage, selling about 15,000 policies and a premium collection of about Rs 170 crore.
Apart from ULPP, three traditional pension plans have also been re-introduced recently. However, pension through the unit-linked platform have always been more popular than traditional plans.
ULPPs score over traditional pension plans as the policyholder has the option of benefiting from equity exposure, says Sanjay Tiwari, vice-president, strategy and product, HDFC Life.
However, the capital-guarantee guideline has drawbacks as well. The guarantee will force insurers to play safe and will not offer risky equity-linked fund options. Also, insurers are levying an additional 'investment guarantee charge'.
THE NEW AVATAR
Since these are essentially unitlinked plans, apart from the guarantee benefit, the basic structure and cost have to be the same as mandated for Ulips. This means there are caps on charges and commissions, which are evenly distributed through the policy term.
In the first five years, the difference between return on investments and net return cannot cross 4 per cent after accounting for commissions and charges. This percentage comes down to 3 per cent by the tenth year and 2.25 per cent after the fifteenth year.
These plans also have a lock-in period of five years. Even if a plan is discontinued before five years, the insurer can't charge over Rs 6,000 as surrender charge.
Additionally, it has been made compulsory to buy annuity at maturity and from the same insurer you bought the pension policy from. While this makes the process seamless, it is restrictive as well.
"Once you buy a pension plan , the same insurer will convert the accumulated corpus into an annuity. So, you have to be sure about your decision as the choice will have a long-term effect, including retirement payouts," says Deepak Yohannan, founder and CEO of MyInsuranceClub.com, an online insurance comparison portal.
Therefore, standardisation does not mean you can choose any plan as service levels will differ. Features such as equity exposure, guaranteed maturity and death benefits, and premium payment terms will also differ.
Moreover, a ULPP isn't the only retirement investment option available. For instance, the national pension system (NPS) is a very good alternative.
ULPP VS NPS
Many are betting on NPS to become a good investment option after the recent changes. Here is a comparison with unit-linked pension plans:
Cost:
The NPS is cheaper. The investment management fee is capped at 0.25 per cent for NPS while pension plans can charge up to 1.35 per cent. Moreover, the charges on a pension plan (premium allocation, policy administration, fund management, etc.) are recurring while several NPS payments are one-time, such as initial subscriber registration fee (Rs 100 plus 0.25 per cent of contribution up to a maximum Rs 25,000) and account opening charges (Rs 50).
Minimum contribution:
The minimum annual contribution for NPS is also lower compared with an insurer's pension scheme. NPS requires a minimum contribution of Rs 6,000 while ULPPs require between Rs 18,000 and Rs 24,000.
Likewise, the penalty for discontinuation of contribution is also higher for ULPPs (up to Rs 6,000). The fund value is then transferred to the Pension Discontinued Policy Fund. Thereafter, you have to pay the discontinued fund management charge of 0.5 per cent annually. While for NPS, It is a flat rate of Rs 100 and the account becomes dormant.
Moreover, there are no deadlines for reactivating a dormant NPS account. You just pay the minimum contribution and penalty for the dormant period. In contrast, a discontinued pension policy can only be revived during the five-year lock-in period and within two years from the date of discontinuance.
Exposure to equity: Pension plans have no cap on exposure to equity as compared with the 50 per cent cap mandated for NPS.
ULPPs offer the flexibility to choose the level of equity participation based on age, risk appetite and retirement age. "ULPPs offer a range of equity exposure (up to 100 per cent). With NPS, equity participation is limited to 50 per cent and restricts returns," says Jayant Dua, MD & CEO, Birla Sun Life Insurance.
So, over the long term, the unit-linked plans have potential to generate better returns.
Withdrawals:
Neither ULPPs nor NPS allow premature withdrawals and you have to compulsorily buy annuity at term end.
When a ULPP matures, one third of the corpus can be withdrawn as lump sum while the remaining will go towards buying an annuity scheme.
In comparison, NPS only allows for withdrawal of up to 20 per cent of the corpus before turning 60 and the rest has to be invested in an annuity scheme. At 60, you can withdraw up to 60 per cent of the investment and the remaining sum has to be put in an annuity scheme. This withdrawal can be deferred up to the age of 70.
NPS offers the advantage of choosing an annuity scheme offering the best rates. With ULPPs, you are mandated to buy the annuity scheme from the same insurer offering the ULPP.
Taxation:
Annual premiums for ULPPs qualify for a tax deduction under Section 80C of the Income Tax Act. On maturity, the one-third withdrawn is also tax-free.
NPS, however, is an EET (exempt-exempt-tax) investment. This means contributions are taxfree but the amount you withdraw at maturity will be taxed with your income. However, this could change in the direct taxes regime.
"Capital guarantee coupled with tax exemption on maturity (for ULPPs), works in the investors' favour," says Yashish Dahiya, CEO, Policybazaar.com.
However, the industry could not ignore the product forever; these once accounted for 20-25 per cent of their business. So, after extended negotiations, the regulator scrapped the guaranteed return criteria.
As per the revised rules, a pension policy had to assure capital protection (meaning no loss, no gain). A few companies have relaunched the product after the guidelines were changed. Currently, HDFC Life, ICICI Prudential and Birla Sun Life offer ULPPs.
Customer response has been encouraging. HDFC Life has had first-mover advantage, selling about 15,000 policies and a premium collection of about Rs 170 crore.
Apart from ULPP, three traditional pension plans have also been re-introduced recently. However, pension through the unit-linked platform have always been more popular than traditional plans.
ULPPs score over traditional pension plans as the policyholder has the option of benefiting from equity exposure, says Sanjay Tiwari, vice-president, strategy and product, HDFC Life.
However, the capital-guarantee guideline has drawbacks as well. The guarantee will force insurers to play safe and will not offer risky equity-linked fund options. Also, insurers are levying an additional 'investment guarantee charge'.
THE NEW AVATAR
Since these are essentially unitlinked plans, apart from the guarantee benefit, the basic structure and cost have to be the same as mandated for Ulips. This means there are caps on charges and commissions, which are evenly distributed through the policy term.
In the first five years, the difference between return on investments and net return cannot cross 4 per cent after accounting for commissions and charges. This percentage comes down to 3 per cent by the tenth year and 2.25 per cent after the fifteenth year.
These plans also have a lock-in period of five years. Even if a plan is discontinued before five years, the insurer can't charge over Rs 6,000 as surrender charge.
Additionally, it has been made compulsory to buy annuity at maturity and from the same insurer you bought the pension policy from. While this makes the process seamless, it is restrictive as well.
"Once you buy a pension plan , the same insurer will convert the accumulated corpus into an annuity. So, you have to be sure about your decision as the choice will have a long-term effect, including retirement payouts," says Deepak Yohannan, founder and CEO of MyInsuranceClub.com, an online insurance comparison portal.
Therefore, standardisation does not mean you can choose any plan as service levels will differ. Features such as equity exposure, guaranteed maturity and death benefits, and premium payment terms will also differ.
Moreover, a ULPP isn't the only retirement investment option available. For instance, the national pension system (NPS) is a very good alternative.
ULPP VS NPS
Many are betting on NPS to become a good investment option after the recent changes. Here is a comparison with unit-linked pension plans:
Cost:
The NPS is cheaper. The investment management fee is capped at 0.25 per cent for NPS while pension plans can charge up to 1.35 per cent. Moreover, the charges on a pension plan (premium allocation, policy administration, fund management, etc.) are recurring while several NPS payments are one-time, such as initial subscriber registration fee (Rs 100 plus 0.25 per cent of contribution up to a maximum Rs 25,000) and account opening charges (Rs 50).
Minimum contribution:
The minimum annual contribution for NPS is also lower compared with an insurer's pension scheme. NPS requires a minimum contribution of Rs 6,000 while ULPPs require between Rs 18,000 and Rs 24,000.
Likewise, the penalty for discontinuation of contribution is also higher for ULPPs (up to Rs 6,000). The fund value is then transferred to the Pension Discontinued Policy Fund. Thereafter, you have to pay the discontinued fund management charge of 0.5 per cent annually. While for NPS, It is a flat rate of Rs 100 and the account becomes dormant.
Moreover, there are no deadlines for reactivating a dormant NPS account. You just pay the minimum contribution and penalty for the dormant period. In contrast, a discontinued pension policy can only be revived during the five-year lock-in period and within two years from the date of discontinuance.
Exposure to equity: Pension plans have no cap on exposure to equity as compared with the 50 per cent cap mandated for NPS.
ULPPs offer the flexibility to choose the level of equity participation based on age, risk appetite and retirement age. "ULPPs offer a range of equity exposure (up to 100 per cent). With NPS, equity participation is limited to 50 per cent and restricts returns," says Jayant Dua, MD & CEO, Birla Sun Life Insurance.
So, over the long term, the unit-linked plans have potential to generate better returns.
Withdrawals:
Neither ULPPs nor NPS allow premature withdrawals and you have to compulsorily buy annuity at term end.
When a ULPP matures, one third of the corpus can be withdrawn as lump sum while the remaining will go towards buying an annuity scheme.
Unit-linked pension plans score over traditional plans as they give policy holder the option of benefiting from equity exposure.
SANJAY TIWARI
Vice-president, Strategy & Product, HDFC Life
NPS offers the advantage of choosing an annuity scheme offering the best rates. With ULPPs, you are mandated to buy the annuity scheme from the same insurer offering the ULPP.
Taxation:
Annual premiums for ULPPs qualify for a tax deduction under Section 80C of the Income Tax Act. On maturity, the one-third withdrawn is also tax-free.
NPS, however, is an EET (exempt-exempt-tax) investment. This means contributions are taxfree but the amount you withdraw at maturity will be taxed with your income. However, this could change in the direct taxes regime.
"Capital guarantee coupled with tax exemption on maturity (for ULPPs), works in the investors' favour," says Yashish Dahiya, CEO, Policybazaar.com.
