Pension Schemes Turn More User-friendly

Chandralekha Mukerji   Delhi     Print Edition: December 2011

The guidelines on pension products were recently modified for the better. From 1 December 2011, you can expect pension plans to be more transparent and user-friendly, while providing a guaranteed return on your capital.

The fresh guidelines have done away with the minimum guaranteed rate of return of 4.5 per cent per annum, but have kept the requirement of guaranteed return intact. While this will ensure that your capital is protected from any potential downside, it can also mean a reduction in equity exposure.

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The Insurance Regulatory and Development Authority (Irda) has asked insurers to give guaranteed return (anything above 0 per cent) on all the premiums paid or a guaranteed maturity benefit, that is, a specific amount as a maturity, surrender or death benefit.

The move will most probably douse the resistance of insurance companies who have been reluctant to offer regular-premium unit-linked pension plans since last year.

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To enhance transparency, insurers will now have to disclose the nature of these guarantees to customers at the time of selling the policy.

"The new guidelines have been introduced in order to make pension plans secure for unit-linked investors by assuring a downside protection and upside potential. This will be beneficial for customers who aren't very informed about market-linked products. However, for investment-savvy customers, this may be disappointing as there will be a curtailment of pure equity exposure in the products," says Rituraj Bhattacharjee, head, market management, Bajaj Allianz Life Insurance.

Money Today Retirement special issue It has also been made mandatory to provide policyholders a benefit illustration at the time of sale and an update of the benefits at the beginning of every financial year.

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At maturity or if you surrender the plan, you can withdraw up to one-third of the corpus as lump sum. The balance will go into buying an annuity or pension product. The annuity plan, however, would have to be bought from the same insurer. You can also utilise the whole amount to buy a single-premium pension plan. If you are below 55, you can also extend the maturity date of the policy.

If the policyholder dies during the policy tenure, the nominee can either utilise the entire proceeds to buy an annuity or choose to withdraw the entire amount.

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The insurance component has been made optional. Insurers can either give it as a part of the policy or offer it as a rider. However, the sum of all the rider premiums should not be more than 15 per cent of the premium paid for the pension plan. Also, the rider premiums would be separate and not included while calculating the assured benefits.

Pension products that do not conform to the new regulatory guidelines will have to be withdrawn by 1 January 2012.

"The regulator has ensured that the best interest of the customer is kept in mind while also providing a broader avenue for insurers to offer pension products," said Puneet Nanda, executive director, ICICI Prudential Life Insurance.

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