Mayank Bathwal, Financial Chronicle, 13/7/2011
A pension plan is designed to generate regular income for individuals once they retire, enabling them to live a financially secure post-retirement lifestyle. Pension plans (also referred to as retirement plans) are offered to help individuals build a retirement corpus through regular and systematic savings. On maturity, this corpus is invested for generating a regular income stream, which is referred to as pension or annuity.
The need for pension plans: The Indian economy lacks access to a comprehensive and in-built social security regime unlike other developed economies and is constantly under strain due to rising life expectancy and the rising cost of inflation. This, coupled with the increasing trend of nuclear family system in India, makes it imperative for individuals to plan their savings towards meeting their post retirement lifestyle.
Thus, robust long lasting and sustainable pension and social security regimes are a must. Though, the Indian market has moved slowly in this direction, nevertheless, recent developments show an encouraging trend.
Some social schemes formulated in the post-independence era like Employees’ Provident Fund and Public Provident Fund have yielded results, but were restricted by a very limited reach leaving tremendous opportunity for innovative and easily accessible solutions in this space.
The market is abuzz with a plethora of financial products that can meet this consumer need. From mutual funds, fixed deposits, whole-life plans to debt pension plans, customer today has a wide choice available to plan his retirement. However, it is important to choose investment that is systematically designed to focus on meeting post-retirement needs and offers you flexibility and transparency.
Why insurance for retirement planning? Insurance offers a wide platform of transparent and flexible product offerings to customers both in the traditional and Ulip space. Pension plans from life insurance companies not only help individuals save for retirement, but also help create regular retirement income from the accumulated sum.
Tax deductions make them a potent investment tool. Tax deductions in pension plans are applicable under 80CCC and 10(A) of Income tax Act on maturity, they provide for a regular stream of income. In case of an eventuality as well some plans offer life cover for the nominees.
There are individuals who like to have a guaranteed corpus of funds at the threshold of their retirement. For individuals like these traditional insurance plans work really well. There are some traditional plans where on the vesting date of their choice customers can receive an amount which is guaranteed right at the beginning.
While, they help offer a guarantee, the flipside of the conventional pension plans is that they invest a major portion of the premium monies in bonds and government securities (G-Secs) which earn a comparatively lower return. And if, one were to factor into the equation of an annual inflation figure of approximately 5-6 per cent per annum, then the real return figures look slightly inadequate.
This is where unit linked insurance plans (Ulips) can play an important role in the retirement planning exercise. They offer an apt combination of debt and equity instruments allowing customers a dual opportunity to earn safe returns while participating in the growing equity markets.
Studies have shown that from a long-term perspective, equities are equipped to give a higher return vis-à-vis other fixed income instruments like bonds and G-Secs. And since, retirement planning is a long-term exercise, individuals would do well to consider investing a portion of their retirement money in pension Ulips. One can also look at investing in Ulip schemes that offer a combination of guarantee and whole life. Through these, customers can not only avail a regular income through partial withdrawals but also be covered for life. Individuals, who fear loss of capital in a Ulip, will find such products attractive.
How Ulip based retirement solutions fare? Usually all retirement plans have two distinctive phases. A retirement corpus is built during the accumulation phase that is when one is saving and investing during the earning years. The second is the withdrawal phase, when one can actually reap the benefits of investment as annuity payouts begin.
In most cases a pension plan allows individuals to make a lump sum payment or a regular contribution every year during their earning years. This money is then invested in funds of customer’s choice and at the time of annuity they can choose to receive the annuity post the vesting age (age at which you become eligible for pension chosen by you at the inception of the plan).
Most of the unit linked pension plans also come with a wide range of annuity options which gives you choice in structuring the post-retirement benefit pay-outs. Also, at the time of vesting you can make a lump sum tax-exempted withdrawal of up to 33 per cent of the accumulated corpus. The earlier you begin the greater you gain post retirement in pension Ulips due to the power of compounding. In order to ensure that customers don’t lose sight of their overall equity allocation, Ulips today offer the flexibility of self management of the funds giving complete investment independence.
Options available to individuals on pension plans: Pension plans come with various annuity options. We have explained them below:
Lifetime annuity without return of purchase price: Under this option, the individual receives pension throughout their lives and ceases on occurrence of an eventuality
Annuity for life with a return of the purchase price: If this option is exercised, the individual receives pension till he is alive. In the event of an eventuality, the purchase price of the annuity is paid out to his nominees/beneficiaries. Purchase price here means the maturity amount, which includes the basic sum assured plus the bonuses/additions, if any.
Lifetime annuity guaranteed for a specific number of years: Under this option, the individual receives a pension for a certain number of years (as prescribed by the plan), irrespective of whether he is alive for the said period or not.
Joint life/last survivor annuity: The individual receives a pension till he is alive. In case of an eventuality, his spouse receives the pension.
A regular premium deferred pension plan: This type of a plan provides the security of life cover during the accumulation phase and offers different ways to get your pension, after retirement.
Though, the industry is awaiting some regulatory changes in the near future on pension plans, evidently, pension plans help individuals plan and systematically prepare for their post-retirement needs. Not only do they aid in building a corpus over a period of time by taking advantage of power of compounding, pension being long-term investment products, but they also provide income for life. That is what makes pension plans a must have in any individuals investment portfolio.
(Mayank Bathwal is a top-level executive with Birla Sun Life insurance)
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