In the yonder years
Till about 2001, life insurance Corporation of India had a pension plan with tons of benefits for retirees. Jeevan Suraksha offered guaranteed returns as pension, reducing the ‘uncertainty’ of income in an otherwise uncertain period of one’s life.
The returns were attractive compared to the premiums paid. But private insurers entered the fray and objected to this ‘certainty’ in payment and changed the rules of the game.
Today, no insurer offers any guarantee of returns on a corpus build-up for annuity or recurring income after retirement. Now, what are your options when going for a pension plan for income in retirement?
Mutual funds and life insurers offer pension plans, but the latter dominate the pension market. Life insurers offer ULIP options in pension as also traditional plans. The latter guarantee additions to the premium with bonuses added—that accumulates over time.
This corpus can be used to purchase an annuity. This accumulation attracts some tax benefits, but the pension paid (monthly, quarterly, half-yearly or yearly) thereafter is a taxable income.
Dig the right foundation Annuity for life: This combines a part of the invested principle, along with a percentage of the returns on it (like the EMI you pay up in a house loan) as pension for life. The incomes terminate with death Annuity for life with guarantee period: Here you determine the period you wish to receive a fixed annuity—10, 15, 20 years—irrespective of the fact that you survive or not; after which if you survive, the annuity continues for as long as you live Joint life and last survivor annuity: After the death of the pensioner, the spouse continues to get the annuity, but it is reduced by 50 per cent. Some insurance companies, however, give the full pension Life annuity with return of purchase price: After death, the entire capital or corpus you paid for the retirement income is returned back to the survivor Life annuity with annuities increasing: Helps if you want your income to increase in the later stages of your retirement. The annuity increases at a simple rate, usually 3 per cent |
On a life annuity which does not provide benefits for survivors, there is no tax on the principal payment but only on the interest portion.
Pension plans have a fixed premium payment term,which if not paid could terminate the plan. But there is comfort as traditional pension plans have a surrender value after a few years.
The corpus build-up in traditional plans are modest. These plans invest in the safest of instruments and, therefore, the corpus grows at around the market rate of interest, which is around 8 per cent currently.
These plans also come with an insurance component—though one need not opt for it thereby allocating more funds for the actual pension. From the fund accumulated, one can buy an annuity from any IRDA-certified provider. Current annuity rates are around 7 per cent.
Both Prudential ICICI and LIC give similar annuities in terms of returns, but there are others who give less, so check the prevailing annuity rates by various insurers to maximise your income.
Apart from the traditional plans, unit-linked pension plans have gained popularity over the last few years. These plans invest in equity and debt and have a lock-in period of three years.
Link it to Units
Unit-linked plans have gained popularity over the last few years, thanks to a bull market trend. In a ULIP plan, the entire risk of capital growth or erosion vests with the pensioner— there are no guaranteed additions per Rs 1,000 as in a traditional plan.
Charges in a unit-linked plan are similar to a traditional plan and cannot exceed 7.5 per cent for the first year.
Agency commission is low (around 2 per cent) and, therefore, unlike insurance, pension policies just do not get sold. You have to do your homework.
Choose a pension plan with care. If you feel the need to monitor a fund, you can choose a unit-linked pension plan. A traditional plan need not be monitored. Unit-linked pension plans allow you to choose your investment risk. If retirement is some miles away, investors can opt for an aggressive portfolio and vice versa.
Returns depend on market conditions. In a unit-linked plan, for example, a balanced fund—with high rated securities and equity— could build you a corpus with returns compounded at about 8-10 per cent. But this does not include the fund management fee of 1.5 per cent every year which becomes substantial in a growing corpus.
Mutual Benefit Funds too provide for that much-needed income in your twilight years.
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There is an option to withdraw before maturity, but that defeats the objective of a pension. Once it is allowed to mature, about 25 per cent can be withdrawn while the rest has to be compulsorily vested with an annuity plan provided by any IRDA-certified provider.
Today, there are many offering annuity products—ICICI Prudential, HDFC, LIC, Max New York Life, etc.
Mutual Terms
Mutual funds offer pension products and they also offer a tax advantage— long-term capital gains tax during redemption is lower than the regular income tax. Post maturity, dividends (in lieu of annuity)are net of tax. It also allows you to monitor your accumulation on a regular basis.
The entry load is between 1.5 and 2.25 per cent, but the exit load, if it’s before maturity, is substantial.
For example, in Templeton India’s retirement plan, the exit load is as much as 10 per cent if the amount invested is less than Rs 10,000 and 3 per cent if the amount is greater than Rs 10,000.
UTI offers lower exit rates—it is 1 per cent after three years and 5 per cent if under one year.
One can build a corpus through Public Provident Fund, which is again tax-free in the accumulation stage as well as the withdrawal stage.
This can be used to purchase an annuity pension plan to get a regular pension. It is just that the interest is taxed at the regular slab rates applicable.
Banks manage funds far more cheaply and efficiently than insurance companies or mutual funds for corpus build-up and the returns on fixed deposits offer a cushion of safety and predictability.
One has to carefully decide one’s options before choosing annuity products which are structured in different ways. Therefore, depending on your needs, you can opt for a pension plan.
All the effort will be worth it and it will ensure you a happy and hassle-free retirement.
