Annuity now mandatory in pension products

The bad news is that the guarantee of 4.5 per cent on unit-linked pension products has been done away with.

The good news is that all pension products will give a non-zero positive return, a guaranteed maturity benefit or assured benefit.

Either guarantee being provided would have to be disclosed to the policy holder at the time of sale.

However, an assured benefit will mean a conservative investment strategy by the insurer. Insurers will not only have to invest in debt instruments to assure a non-zero return; they will also not be able to provide many fund options to policyholders, say life insurers.

As the guarantee is to be given either on the capital or returns, insurers say they can play on this option.

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Andrew Cartwright, chief actuary of Kotak Mahindra Old Mutual Life Insurance, says, "The biggest advantage is that pension products will not function like a retirement fund."

The existing products gave an option wherein policy holders could withdraw the accumulated fund, not necessarily to buy annuity, specially if retiring before the age of 58 or 60, as the case may be.

However, from December 1, all pension policy holders will necessarily have to buy an annuity from a third of the accumulated amount.

In case you don't need the sum immediately, the new products will have the flexibility to extend the vesting date. You can buy a single premium deferred pension product.

The deferment period is the time period between the accumulation and annuity phase.

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Explains V Srinivasan, chief financial officer at Bharti AXA Life Insurance, "Say you retire at 50 but don't need the pension then. The deferred plan will push the vesting date to 55 or 60 or from whenever you choose to get a pension."

But, deferment is possible only if a policyholder is below 55 years of age, lowering the annuity purchase age to 55 as opposed to 58 or 60. This will help those in need of a regular income earlier than the age of 60.

On surrender after the lock-in (of five years), a policyholder can either buy a deferred policy or compulsorily purchase annuity, at the then prevailing annuity or pension rate (approved by the authority).

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"Existing policy holders have the option of withdrawing a lump sum when surrendering the policy," says G N Agarwal, chief actuary at Future Generali Life Insurance.

However, if you want to discontinue a unit-linked pension plan before lock-in, you can withdraw the accumulated fund without buying an annuity.

At the time of surrender or vesting, annuity will be available at the prevailing rate, which can vary across insurers.

Here, Cartwright says it is better to stick to your own insurer. For, if you go to another insurer under the lure of a higher rate, you will have to buy a deferred plan for a minimum of one year. And, a year later, the rate could change.

The insurance regulator has also given conservative illustration rates. Till now, illustrations were made on six and 10 per cent.

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Henceforth, it has to be done at four and eight per cent. Not guaranteed, just for illustration.

The benefit illustration has to be provided not only at the time of sale but in every year of the tenure, so that the policyholder can track his/her investment every year.

The guideline asks pension products to provide a life cover rider in the deferment period. Now on, total premiums for riders on pension policies would be capped at 15 per cent, as against 30 per cent, making it safer.

The regulator also wants insurers to disclose the size of corpus to be accumulated at the end of the policy period, after due diligence of the customer's profile.

Insurers must consider the client's income, expenses and premium paying capacity before deciding on the corpus, to help plan his retirement better. Any risks involved should also be informed.