Banking on pensions
Nitya Varadarajan April 14, 2008
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.
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.
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.”
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.
“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.”