All you wanted to know about pension plans!

Pension plans offered by life insurance companies help individuals plan effectively for their retirement. For, it is pension plans that provide individuals with a regular income in their golden years.

However, since the tax benefit on such plans is limited to Rs 10,000, investments in such plans have been somewhat subdued. Apart from the tax benefits, it is important that individuals evaluate pension plans from a retirement planning perspective.

This article takes a closer look at pension plans and the role they play in the individual's retirement planning exercise.

What are pension plans?

Simply put, pension plans (also referred to as retirement plans) are offered by insurance companies to help individuals build a retirement corpus. On maturity this corpus is invested for generating a regular income stream, which is referred to as pension or annuity. Pension plans are distinct from life insurance plans, which are taken to cover risk in case of an unfortunate event.

Pension plan details

Age (Yrs)	Sum assured (Rs)	Tenure (Yrs)	Annual premium (Rs)	Maturity amt (@6%) (Rs)	Maturity amt (@10%) (Rs)
30	500,000	30	13,500	960,000	1,590,500
		Actual rate of return (%)		5.10	7.80
		Annuity amt (Rs)		71,500	118,500

The example given above is illustrative. It will differ across insurance companies.

Let us take an individual aged 30 years who wants to buy a pension plan with a sum assured of Rs 500,000 for a 30-year tenure. The premium to be paid for the same is approximately Rs 13,500. In case of an eventuality, the beneficiary will stand to get the sum assured of Rs 500,000 plus the bonuses/additions, if any.

In case the individual survives the tenure, he will stand to benefit to the tune of the maturity amount as indicated in the table below. Assuming that he buys an annuity for life, the annual amount he would get as pension would be approximately Rs 71,500 (on Rs 960,000) or Rs 118,500 (on Rs 15,90,500). The option of receiving monthly/quarterly/half-yearly pension is available with most life insurance companies.

However, the returns shown at 6% and 10% are not calculated on the premium paid. They are calculated after deducting expenses from the premium. The actual compounded annual growth rate (CAGR) on the premium works out to approximately 5.10% (for the 6% figure) or 7.80% (for the 10% figure).

Pension plans comparison table

	ICICI Prudential (ForeverLife)	Tata AIG (Nirvana)	Bajaj Allianz (Swarna Vishranti)	LIC (Jeevan Suraksha/ Jeevan Dhara)	LIC (Jeevan Nidhi)	HDFC Personal Pension Plan
Product type	Regular pension plan	Regular pension plan	Regular pension plan	Regular pension plan	Regular pension plan	Regular pension plan
Minimum annual premium (Rs)	6,000	-	5,000	2,500	3,000	2,400
Minimum cover (Rs)	50,000	50,000	50,000	50,000	50,000	-
Min-Max. tenure (Yrs)	5 yrs - 30 yrs	-	5 yrs- 40 yrs	2 yrs - 35 yrs	5 yrs - 35 yrs	10 yrs - 40 yrs
Min/Max Age at entry (Yrs)	20-60	18-55	18-65	18-65 (for Jeevan Dhara); 18-70 (for Jeevan Suraksha)	18-65	18-60
Min-Max vesting age (Yrs)	50-70	50-65	45-70	50-79	40-75	50-70
Riders available	Critical illness rider, Accident and disability benefit rider	Term rider, Critical illness rider, Accident rider	Term cover, Critical illness cover, Hospital cash benefit, Accident benefit, Family income benefit	Term assurance rider, Critical illness rider	Accidental death and disability benefit rider, Term assurance rider, Critical illness rider	No
Life cover available	Yes	-	Yes	Yes	Yes	-

Conventional pension plans invest a major portion of the premium monies in bonds and government securities (G-Secs). That is why the returns are on the lower side. And if one were to factor into the equation an annual inflation figure of approximately 5%-6% per annum, then the real return figures look even more unimpressive.

This is where unit linked insurance plans (ULIPs) can play an important role in the retirement planning exercise. ULIPs have a mandate to also invest a portion of the premium in the stock market apart from bonds and G-Secs.

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.

Pension ULIPs: How they fare

	ICICI Prudential (Lifetime Pension II)	HDFC Standard Life (Unit Linked Pension Plan)	Birla Sun Life (Flexi SecureLife II)	LIC (Future Plus)	Bajaj Allianz (UnitGain easy Pension)
Product type	Market linked plan	Market linked plan	Market linked plan	Market linked plan	Market linked plan
ULIP fund options	Pension Maximiser II (Growth), Pension Balancer II (Balanced), Pension Protector II (Income), Preserver	Growth fund, Equity managed fund, Balanced fund, Defensive fund, Secure fund, Liquid fund	Nourish, Growth, Enrich	Bond fund, Income fund, Balanced fund, Growth fund	Equity index pension fund, Equity plus pension fund, Equity MidCap plus pension fund, Debt plus pension fund, Balanced plus pension fund, Cash plus pension fund
Allocation to equities	Up to 100% in pension maximiser-II; up to 40% in pension balancer-II; nil in Protector II & Preserver	100% in growth fund; 60-100% in equity managed fund; 30-60% in balanced fund; 15-30% in defensive managed fund; nil in secure managed & liquid fund	Up to 35% in Enrich; up to 20% in Growth; up to 10% in Enrich	Bond fund: NIL; Income fund: Not more than 20%; Balanced fund: Not more than 30%; Growth fund: Not more than 60%	Equity index pension fund: at least 85% in stocks primarily from NSE Nifty Index; Equity plus pension fund: at least 85%; Equity MidCap plus pension fund: at least 50% in midcap stocks; Debt plus pension fund: NIL; Balanced plus pension fund: 30%-50% in equity index fund and 50%-70% in debt plus fund; Cash plus pension fund: NIL
Minimum premium (Rs)	10,000	10,000	5,000	5,000	10,000
Life cover option available	Yes	No	Yes	Yes	No
How is Sum assured calculated	Option 1: Zero sum assured. Pure accumulation. Option 2: Sum assured = annual contribution X tenure.	Sum assured = Rs 1,000 plus the fund value.	10 times the regular premium amount.	5-20 times the annualised premium	Zero sum assured. Pure accumulation.
Min/Max Age at entry (Yrs)	Option 1: 18-65. Option 2: 18-60	18-60	18-65	18-65	18-65
Min-Max vesting age (Yrs)	45-75	50-70	50-70	40-75	45-70
Initial years' expenses	17%-22% in first yr. 12%-15% for second yr.(Exact percentage depends upon the annual premium amt).	8.50%-22% for years 1 and 2. (Exact percentage depends upon the annual premium amt).	21% for the first year.	8%-13% for years 1 and 2. (Exact percentage depends upon the premium amount). *	15% for the first year.
Fund management charges	Maximiser II- 1.5%; balancer-1.0%; protector II & preserver-0.75%	0.80%	1%	Bond fund and Income fund: 1%; Balanced fund: 1.25%; Growth fund: 1.50%	Equity MidCap plus and Equity plus pension funds: 1.5%; Equity index pension fund: 1%; Debt plus pension fund and Cash plus pension fund: 0.70%; Balanced plus pension fund: As applicable on component funds
Expenses after initial years (%)	1% for years 3 to 10. Nil thereafter.	1% third yr onwards.	2.2% second year onwards	2.50%	2% second year onwards
Fixed monthly expenses (Rs)	20	15	35 (Additional charge of Rs 2 levied in case life insurance cover opted for)	15	20
Charges on top-ups (%)	1% of top-up value for first 10 yrs. Nil thereafter.	2.5% for initial two yrs. 1% thereafter.	1%	1.25%	2%
Switch charges	4 free switches in a year. Rs 100 per switch thereafter	Up to 5 free switches in a year. Up to 2% of the switched amt may be charged for additional switches thereafter.	2 free switches in a year. 0.50% of the amt transferred thereafter.	4 free switches in a year. Rs 100 per switch thereafter	3 free switches in a year. 1% of switched amt or Rs 100, whichever is higher thereafter.
Apart from the expenses mentioned above, LIC's Future plus also charges for the following: (1) Life cover charge (as applicable) (2) Administration charge: Rs 1 per thousand of sum assured subject to a max. of Rs 1,000 in each of the first 2 years. (3) Policy charge: Rs 0.10 per thousand in each of the first 2 years (in case of life cover); Rs 0.10 per thousand of the total premiums payable in each of the first 2 years

The information in the table is as sourced from companies' Web sites. Individuals are advised to contact the insurance company for further details. Fixed monthly expenses for some companies are subject to inflation-based indexation and may change in future. Companies reserve the right to change their policies anytime in the future.

Having said that, it is also important that investments in ULIPs are made after considering expenses like fund management charges since this will impact returns over the long-term. Also, don't lose sight of your overall equity allocation.

For example, if the individual has already invested a significant amount of his money in stocks and equity funds, then he might be better off investing in a conventional pension plan from a diversification perspective.

ULIPs other important benefits like liquidity. You can withdraw money from a ULIP to meet emergencies. Also, you can invest surplus money (i.e. top-ups) over and above the premium amount.

Some insurers have launched capital guarantee ULIPs. Such products aim to guarantee the premiums paid by the individuals (net of expenses) plus the bonus declared, on maturity. Individuals, who fear 'loss of capital' in a ULIP, will find such products attractive.

However, capital guarantee ULIPs have lower equity exposure which could dampen returns for the aggressive investor.

'With cover' and 'without cover' plans

Pension plans are also classified as 'with cover' and without cover' plans. The 'with cover' pension plans offer an assured life cover (i.e. sum assured) in case of an eventuality.

Under the 'without cover' pension plan, the corpus built till date (net of deductions like expenses and premiums unpaid) is given out to the nominees in case of an eventuality. There is no sum assured in this case.

'Immediate annuity' plans and 'Deferred annuity' plans

Pension plans are also classified as 'immediate annuity' plans and 'deferred annuity' plans. In case of immediate annuity plans, the annuity/pension commences within one year of having paid the premium (which is usually a one-time premium).

The premium paid for the immediate annuity policy is also known as the purchase price. Currently in India, very few life insurance companies offer immediate annuity plans. LIC's Jeevan Akshay II is an example of an immediate annuity pension plan.

In case of deferred annuity, the annuity/pension does not commence immediately; it is 'deferred' up to a time, which is decided upon by the policyholder. For example, if an individual buys a pension plan with tenure of 30 years (also known as the 'deferment period'), then his annuity will begin 30 years hence.

Deferred annuity premiums can be paid as a 'single premium' or as regular premium. Presently, most pension plans available are deferred annuity plans.

Difference between conventional life insurance plans and pension plans

There are some fundamental differences between life insurance plans and pension plans, with the objective behind both of them, being the most important. Life insurance plans aim at covering the risk from an unfortunate event. Pension plans on the other hand work on the opposite scenario that if an individual survives beyond an age (retirement age), he will need to provide for himself.

The difference in objectives is the main reason for the differences in the features of life insurance and pension plans.

Spot the difference

	Conventional insurance plans	Pension plans
Maturity payouts	Full maturity amount received by the individual	Only up to one-third of the maturity amt can be withdrawn. Remaining 2/3rd amt has to be compulsorily invested in an annuity.
Death benefits	Full maturity amount received by the nominees/ beneficiaries	Nominees/ beneficiaries have the option of receiving either the entire maturity amt or investing up to 2/3rd of the amt in an annuity.
Tax benefits	Deduction up to Rs 100,000 available under Section 80C	Deduction up to Rs 10,000 available under Section 80CCC.
Taxation of maturity payouts	Entire maturity amt treated as tax free in the hands of the receiver	Up to 1/3rd of the maturity amt, if withdrawn, is treated as tax-free. Pension received on the remaining 2/3rd amt is taxed as per the individual's tax slab
Stream of income	Entire maturity amt/ death benefit received in one go. No provision for a stream of income by way of pension.	On maturity, provides for a regular stream of income. In case of an eventuality, option of pension benefits available

1. Maturity payouts

In case of conventional insurance plans, the individual receives the entire corpus on maturity. However, in case of pension plans, the individual has the option of withdrawing up to one third of the maturity amount in cash.

He will have to buy an annuity with (at least) the remaining two thirds amount from any life insurer of his choice.

2. Death benefits

In case of an eventuality under life insurance plans, the nominees receive the sum assured plus the bonuses/ additions if any. Not all pension plans offer a life cover (as already covered above). Also, in case of a pension plan, the nominee has the option of receiving the entire amount on maturity in cash and buying an annuity with the same.

3. Tax benefits

Premium paid up to Rs 100,000 per annum is eligible for deduction under Section 80C in case of insurance plans. However, premium payments towards pension plans are eligible for deduction under Section 80CCC; the limit being set at Rs 10,000.

However, the deduction under Section 80CCC falls under the overall limit of Rs 100,000. For example, if an individual pays a premium of Rs 15,000 for a pension plan, then the tax benefit of Rs 10,000 only. Also, his overall tax benefit will stand reduced to Rs 90,000 (i.e. Rs 100,000 less Rs 10,000).

4. Taxation of maturity payouts

The maturity amount in case of conventional insurance plans is treated as tax free in the hands of the individual. However, it is slightly different in case of pension plans. Up to one third of the maturity amount, which can be withdrawn, is treated as tax free in the hands of the individual.

The pension, from the remaining two-thirds amount, is taxed according to the marginal rate of tax.

5. Income stream

On maturity, pension plans provide a regular source of income by way of annuities. In case of conventional plans, the individual receives the entire maturity amount in lump sum.

Options available to individuals on pension plans

Pension plans come with various annuity options. We have explained them below:

1. Lifetime annuity without return of purchase price: Under this option, the individual receives pension for as long as he lives. The pension ceases on occurrence of an eventuality and the insurance contract comes to an end.

2. 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.

3. Lifetime annuity guaranteed for a certain 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. A major positive of this option is that, if he survives the period, he continues to receive pension for the rest of his life.

For example, if the individual has opted for 'Lifetime annuity guaranteed for 15 years', and he meets with an eventuality after only 3 years, then his nominees will keep receiving annuity for the remaining 12 years (i.e. 15 years less 3 years). After the said 15-year period, the annuity will cease and the pension plan will draw to a close.

4. Joint life/ Last survivor annuity: The individual receives a pension till he is alive. In case of an eventuality, his spouse receives the pension.

Apart from the options mentioned above, some companies also offer both, 'with' and 'without return of purchase price'. Under the 'Joint life / last survivor annuity with return of purchase price', in case of an eventuality to both the individual as well as his spouse, the purchase price of the annuity is 'returned' to the nominee.

Evidently, pension plans help individuals prepare for their retirement needs. Not only do they aid in building a corpus over a period of time, but they also provide income for life. That is why it is important that individuals include pension plans while conducting their retirement planning exercise.

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