Those buying pension plans from insurance companies may soon find the returns are too low. The minimum guaranteed return - 4.5 per cent (subject to change) - is unlikely to beat inflation. This is not comforting for someone looking at building a retirement corpus through a pension plan.
The new-look pension plans, according to the Insurance Development and Regulatory Authority guidelines, will be launched from September 1.
"This will protect investors' lifetime savings from adverse fluctuations at the time of maturity," Irda had said while issuing the guidelines.
The only section that feels this guaranteed return - higher than the 3.5 per cent that savings deposits offer - is too high is the insurance community itself. According to reports, insurers plan to approach the regulator to reduce this rate.
"Due to the regulation, companies will have to channelise their strategies to ensure guaranteed returns on regular premium plans. Investments in equity instruments will become limited or even nil. This product will lose appeal," said G N Agarwal, chief actuary, Future Generali India Life Insurance Company. Agarwal said a person needed prominent equity investments to get returns that could beat inflation.
While the guaranteed return is quite low, the regulator has also taken other steps that will result in forced savings for the buyer. For one, the policyholder will not be allowed partial withdrawals during the tenure of the policy.
On maturity, the pensioner can commute up to one-third of the corpus in hand. For the remaining two-thirds, Irda said: "The insurer shall convert the accumulated fund value into an annuity at maturity." The same applies even to a person who surrenders the policy midway.
"All other guidelines for Ulips apply to retirement products, too. These include distribution of overall charges evenly during the lock-in period, a cap on charges and a lock-in for five years," said the head of product development at a life insurance company.
In comparison, there are other pension products that offer better returns. For example, UTI Mutual Fund and Franklin Templeton Mutual Fund have one pension scheme each. Both have a debt-equity ratio of 60:40.
Templeton India Pension has returned 13.85 per cent annually since its launch over 13 years ago. UTI Retirement Benefit Pension has given returns of 11.53 per cent in over 15 years since its launch in December 1994.
The Franklin Templeton Mutual Fund scheme allows withdrawal after 1,095 days (three years). UTI Mutual Fund's scheme offers two options a three-year lock-in or no lock-in. The three-year lock-in scheme gives tax benefit.
Then, there is the public provident (PPF) fund and the employee provident fund (EPF). These two work out to be better options because of their impressive returns of 8.5 per cent (EPF) and eight per cent (PPF), respectively.
The amount accumulated in EPF is paid at the time of retirement. When a person changes a job, he can either withdraw the entire amount or get the account transferred to the new organisation. The tenure of a PPF account is 15 years and an employee can extend it by another five. A PPF account holder can also make partial withdrawals.
The three options - mutual funds, EPF and PPF - give the pensioner the freedom to plan investments after retirement at will.
On the other hand, a Ulip pension plan will allow only one-third of the corpus to be commuted, as the rest will have to be used to purchase an annuity. Moreover, annuity plans have their own drawbacks.
For example, if a person opts for a plan where the spouse should continue to get money after his demise, the payout will be lower.
"Someone who wants the same comfort earlier pension plans offered can look at the New Pension Scheme (NPS)," said Malhar Majumder, a certified financial planner. NPS is equally tax effective and offers life-stage investing the equity-debt allocation changes with age.
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