Banking on pensions

Financial planning for one’s retirement should start as early as possible. Waiting till the mid-40s or even later to get into the act, as most of us end up doing, can result in a small and sub-optimal retirement corpus, thereby impacting the quality of one’s retired life.

So, choosing a retirement product to suit one’s requirements is important. Shivaraya Prabhu, for instance, bought his first retirement plan this year— ING Vysya’s Golden Years Retirement Plan, which is a unit-linked pension scheme. His yearly premium liability is Rs 30,000.

The Prabhus The plan: ING Vysya’s Golden Years Retirement Plan. The product: Pension-linked unit scheme. The premium: Rs 30,000 a year

Prabhu, 47, is a trained physiotherapist who also doubles up as a consultant to various colleges. Besides his wife Aarthi, 46, he has two sons—Satyendran who is a fourth-year student in an engineering college and Sandeep who is in Class 12.

Explaining the rationale for his decision, he says: “My wife has also subscribed to a traditional pension plan. We feel a ULIP plan is better in the long run in terms of returns. I could not start investing in pensions earlier owing to some commitments, but I think retirement planning is important for one and all.’’

However, the scheme selected by Prabhu is just one of the several types of unit-linked pension plans that have been launched recently by insurance companies.

For instance, ICICI Prudential offers a choice of six pension funds, while ING Vysya offers three—equity, debt and liquid funds.

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Then, there is Bharti Axa, which recently set up an asset management company to manage its funds. Unlike others, Bharti Axa offers flexible premium payment options within the same plan to suit one’s means.

Says D. Arulmany, Business Head, DBS Cholamandalam Distribution: “Pension plans should constitute an important part of a person’s portfolio. Today, there are plans that take into account specific risk appetites of people by offering variable combinations of equity, debt and money market securities, bearing in mind the safety of the fund.”

Choosing the right plan What one should and shouldn’t be doing. The Dos Make sure your pension plan offers more advantages than ULIPs, particularly in terms of costs If you are uncertain about your consistent savings potential, there are funds that offer single-premium options. A falling market (like the current one) may be a good time for this option, particularly in equity funds There are many schemes that charge a hefty premium allocation fee and lesser for top-ups. Opt for a smaller investment in the first year and increase the amount later Choose insurers who offer a wide range of funds and flexibility to switch between them Before you choose your insurer, check out the performance of the fund. Once you are tied down to an insurer for pension, exiting could become more expensive if you want to park your corpus with another insurer. A check on the three-month performance after the January 10 crash could be a great indicator The Don'ts Don't opt for a life cover. This reduces the investment corpus. Opt for a simple term assurance instead in the traditional platform Don't opt for return of purchase price if your retirement kitty is small. Your nominee may not get the benefits after you, but you and your spouse have to live out your retirement life in comfort If you have to retire in less than seven years, don't opt for a pension plan at all. A SIP with a mutual fund will be better as it is more cost effective in the short-run. You could always purchase an annuity later If you are totally risk-averse, don't opt for the unit-linked pension plan.a conservative plan offered by a traditional insurer will save you the headache of monitoring bull and bear markets returns

ICICI Prudential and ING Vysya offer portfolio management for people who are not mutual fund-savvy or have little time to learn the niceties.

LIC’s Market Plus product levies a low premium allocation charge upfront and distributes this at the rate of 2.5 per cent till the end of the tenure.

In contrast, many others stop charging this after the fifth or sixth year. Also, tracking LIC’s surrender values is a tedious exercise— investors have to get it from agents.

Says Y.V.D.V Prasad, Director (Business Development), ING Vysya Life Insurance, which follows a similar strategy of levying low premium allocation charges: “Money buys more today than it will do tomorrow. If a lesser amount is collected upfront, there is more left for investment purposes and there is a greater compounding benefit.”

ING Vysya gives its customers loyalty additions from the first year at the rate of 0.2 per cent of the fund value if less than Rs 10 lakh and 0.3 per cent if more than Rs 10 lakh.

Tata AIG gives as much as 3 per cent of the fund value at maturity. This addition accrues from collections made from various charges levied under different heads. So, one should always take the trouble of studying the plan charges to find out whether the perceived returns will work out satisfactorily.

Pension plans allow a commutation of one-third of the fund value at the end of the accumulation phase. Subsequently, the pensioner has to buy an annuity—he has the freedom to buy it from any company offering it.

However, annuity rates are currently very discouraging, at around 6 to 7 per cent. This has encouraged certified financial planners like Ramesh Chordia, Managing Director, Insuregain.com, to offer alternative solutions.

According to Chordia, one can purchase a ULIP plan every year for the next 20 years so that a plan matures every year from the 21st year onwards.

The income on maturity will be tax-free for that year.

“Remember that returns from an annuity are not only moderate but also taxable,” he says. He is also not averse to pension schemes being a part of the portfolio or regular SIPs doubling up as a pension plan with systematic withdrawal. According to him, with a corpus accumulated through various routes, one can also opt for monthly income plans in a mutual fund.

So, before opting for any pension plan, study the offering in detail to distinguish baits from true benefits. Also, it’s never too late to invest in retirement plans. Says Prabhu: “We have started late on our pension plans, but, as my wife says, it is better late than never. I hope to contribute to the plan till I am 60. My expectation is that if we get a return of at least 15 per cent on the corpus we are building up, we should get a decent pension.”