All Pension Plans in India
Retirement with financial freedom is everyone’s dream but it comes at a cost of investments during the working years. Such investments are to be carefully planned in advance to ensure that all investments made make most out of the money that has been invested. There are many things to consider will working with pension plans. For example, one needs to take a look at the tax benefits, the monthly income flow etc.
Retirement plans or pension plans in India are provided by life insurance companies that are operational in the country. However, there is also a central government backed retirement plan, which is not really as effective as the ones offered by life insurance companies.
Before we take a look into all pension plans in India, we will like to make a few concepts clear. To start with, we will provide a difference between a pension plan and actual pension.
So, what is a pension plan?
A pension plan is also sometimes referred to as a retirement plan. It is actually a system where investments made by an individual will help him or her to generate wealth over time. This wealth is known as pension corpus or retirement corpus. This retirement corpus is not pension.
Then, what is pension?
Once the retirement corpus is generated over years of investment, the accumulated money gets invested in market. This investment then generates a stream of income every month, which is technical terms is known as annuity. This annuity is handed over to the owner of the retirement plan every month as a monthly income and is known as pension.
How does a pension plan work?
In order to understand this, we will consider a quick example in the table below and provide an explanation for the same.
|Age||Sum Assured||Term||Annual Premium||Maturity Value at 6% Annual Interest||Maturity Value at 10% Annual Interest|
|30 Years||INR 500,000||30 Years||INR 13,500||INR 9,60,000||INR 1,590,500|
|Actual Annual Rate||5.10%||7.80%|
|Annual Annuity||INR 71,500||INR 118,500|
* The above table is purely illustrative by nature and it may or may not have any relation with any pension plan offered by any life insurance company in India.
Explanation of the table:
Suppose Mr. X decides to purchase a pension plan at the age of 30. He decides that he will invest for 30 years straight (term) and he want a sum assured of INR 500,000. This means that if something happens to him (i.e. he dies) before he completes his 30-year term, his nominee will receive the minimum of INR 500,000 plus interests and bonuses whatever his plan earned when Mr. X was alive. That’s the extreme condition we are talking about.
However, if Mr. X survives the tenure of 30 years and pays all his annual premiums of INR 13,500 a year, he will have a retirement corpus of INR 960,000 if the rate of interest was 6% and he will have a retirement corpus of INR 1,590,500 if the rate of interest was 10%.
Interestingly however, you will notice that the maturity amount is less that what it should be at 6% or 10% interest. This happens because the interest is not calculated on the amount of money he actually deposits. Rather, the insurance company will deduct all the expenses it has to incur for managing the funds and running Mr. X’s account and then apply interest. This means the actually annual rate effectively falls to 5.10% or 7.80% for 6% and 10% respectively. The annual annuity that Mr. X will be entitled for after maturity of the plan (that is after the term of the plan ends) is calculated using the actual annual rate. Also remember that the calculations are made using the formula or compounded annual growth rate or CAGR.
The annuity calculations above are an example where Mr. X decides to buy annuity for life. This means that he decides to keep getting annuity for as long as he lives. In such a situation, the insurance company will allow either a monthly income stream or a quarterly, half-yearly or yearly income stream. Depending on what Mr. X chooses, the insurance company will pay out the annual annuity accordingly.
Where is this sum assured coming from in the above example?
You must have notice that in the above example we stated that in case Mr. X dies before the term of 30 years, his nominee gets a sum assured of INR 500,000 plus any bonuses and interests accrued. This simply means that he planned for a life coverage.
So, pension plans from life insurance companies come in two variants: with coverage and without coverage. Here is a quick difference between the two:
|With coverage pension plan||Without coverage pension plan|
|There will be assured life coverage in case the plan owner dies before completion of term||There is no assured life coverage in case the plan owner dies before completion of the term|
|Insurance company pay out the sum assured plus any interest and bonus accrued||The insurance company will pay out only the money deposited minus all expenses incurred by the company|
Pension plans also come with options of deferred and immediate annuity plans
In our above example we said that Mr. X starts earning annuity after 30 years of term is completed. This is a classic example of deferred annuity plan. It simply means that a pension play will not start paying annuity or pension (either monthly, quarterly, half-yearly or yearly) until the maturity period is reached or until the deferment period as opted by the plan owner is completed.
The plan owner can choose to start getting annuity after a certain number of year. This is known as deferment period and plans sold under this format are known as deferred annuity pension plans.
On the other hand, a person can also opt for immediate annuity plan under which pension earnings will start within a year after the premium is paid. This premium is usually a single-time premium and is referred to as the purchase price of the plan.
Immediate annuity plans are not very common in India and only a handful of insurance companies offer such plans. For example, Jeevan Akshay II from Life Insurance Corporation of India is an example of pension plan where immediate annuity option is available. Most of the pension plans offered by life insurance companies are deferred annuity plans.
Interestingly, just like in case of immediate annuity plans, a deferred annuity pension policy holder will have the option of paying the premiums as a single premium. However, paying monthly premiums is better because it puts less financial stress.
So, if pension plans come with assured life coverage then why need life insurance?
Nice question and we must say, it is a brilliant question! Well, the two are very different with the difference lying in the fundamental concepts and the final objectives that you want to achieve. Let us see the base difference between the two:
Life Insurance: The primary objective here is to ensure financial support in an unfortunate event of death of the policy holder.
Pension Plan: The primary objective here is to ensure that a person who lives beyond a certain age (retirement age) maintains a healthy financial backup so that he or she can provide for himself or herself. Here the scenario of death is not at all considered.
While this remains the base difference between the two forms of financial products, there are several other differences that will explain to you why you need a separate life insurance plan and a pension plan. The differences are summed up in the table below:
|Parameter||Pension Plan||Life Insurance Plan|
|Payout after maturity||Of the total maturity amount, the pension holder can withdraw only 1/3rd of the total corpus. 2/3rd has to stay back so that it can be invested for annuity generation.||The insurance plan holder gets the money after maturity is achieved and the insured person survives the policy term.|
|Benefits||Tax||Tax exemptions are available under 80CCC but limited to only INR 10,000.||Tax exemptions under 80C are available up to INR 100,000.|
|Death||If the pension holder dies, the beneficiaries of the nominees can select to either withdraw the entire maturity amount or they can simply withdraw 1/3rd and use the remaining 2/3rd for annuity generation.||In case the insurance holder dies, the maturity amount is given to the beneficiaries or nominees.|
|Tax obligations on maturity payouts||1/3rd of the amount withdrawn in lump sum after maturity will be exempted from any form of tax. However, the annuity earned on the remaining 2/3rdamount will be taxable under the same rule of income tax for everyone else (that is taxed depending on income slab).||In the receiver’s hand, the maturity amount becomes totally tax free.|
|Income stream generation||Generates income stream after a certain number of years. In case the pension holder dies, the nominees or beneficiaries can choose to continue with the income stream.||This feature is not available in case of life insurance. The death benefit or maturity amount is handed over to the beneficiary or nominee in a single go as a lump sum amount.|
You need to remember a few things:
- When it comes to taxation, life insurance plans are life savers because they can help to avoid taxes far better than pension plans.
- Pension plans are all designed for generating monthly income streams (some may opt for quarterly or half-yearly or yearly income streams but monthly income streams are far more common). Life insurance will not do this.
Options available under pension plans
Life insurance companies have come up with an array of options that users can select while purchasing a pension plan. A person needs to analyze his or her needs properly and select the one that suits him or her best. Let us take a quick look at the different options available when it comes to choosing a pension plan.
- Lifetime annuity but purchase price not returned: Here the pension holder will keep receiving annuity for as long as he or she survives. Once the person dies, the contract ends and the company will have no further obligations to make any payments of any kind.
- Lifetime annuity but purchase price is returned: Here the pension holder will keep receiving annuity for as long as he or she survives. Once the person dies, the beneficiaries or nominees of the person will receive the purchase price. Here the purchase price refers to maturity amount plus bonuses if any.
- Guaranteed lifetime annuity for a predefined number of periods: This is a unique strategy in which a pension holder will opt for lifetime annuity that will be guaranteed for a predefined number of periods in case of his or her death. The meaning is confusing but here is a simple explanation. A person decides to go for guaranteed lifetime annuity for 25 years. In an unfortunate event if he or she dies after say, 5 years, the annuity flow will continue to the nominee for the remaining 20 years and then the contract ends. However, if he or she survives all through 25 years and survives beyond, he or she still continues to get annuity payments for as long as he or she survives.
- Last survivor/Joint life annuity: This too is pretty interesting. A pension holder can opt for joint life annuity in which the pension holder will get annuity payouts for as long as he or she lives. Once the pension holder dies, the annuity is passed on to his or her spouse and annuity payment continues until the spouse dies. However, if the spouse dies before the death of the pension holder, the annuity flow will end when the pension holder dies.
The aforementioned 4 options are basic options of pension plans. There are several other sub-variants which are derivatives of any of the four basic variants. For instance, in case of last survivor/joint life annuity plan, there may be an option of returning the purchase price to the last survivor or in case of death of both, a nominee can get the purchase price. So, all variations actually remain as derivatives but can be useful under different circumstances. It is strongly advised to people that they should properly analyze their situation before opting for pension plans.
Problems with pension plans
To be honest, pension plans are not foolproof. There are glitches and none of the insurance companies address them. Here are some of the important problems that you need to keep in mind:
- In case you suddenly lose your job you will not be able to pay the premiums regularly. There is no fallback mechanism available with any insurance company.
- You may become jobless because of critical health problems for a certain number of years. As before, regular premium payments may become a big problem with no solution provided by insurance companies.
- None of the insurance companies take account of the option of divorce which can lead to so difficult financial conditions that paying premiums on a regular basis can become a big problem.
All Pension Plans in India
Okay, by now we believe that you have a fairly sound understanding of how pension plans work and what make them different from insurance policies. You must also be aware of the strengths and weaknesses of the pension plans. It is time that we take a look at the different pension plans you have at your disposal. A word of warning though – there are several insurance companies operating in India and all them have a good number of pension plans in their portfolio. It is literally not possible to sum up all of them here in a single article. We will give you a comparative study of few of the most popular pension plans from some of the top insurance companies in India.
|Parameters of comparison||LIC – Jeevan Suraksha and Jeevan Dhara||ICICI Prudential – Forever Life||HDFC Personal Pension Plan||LIC – Jeevan Nidhi||Bajaj Allianz – Swarna Vishranti||Tata AIG – Nirvana|
|Type||Regular plan||Regular plan||Regular plan||Regular plan||Regular plan||Regular plan|
|Annual Premium – minimum||INR 2500||INR 6000||INR 2400||INR 3000||INR 5000||INR 5000|
|Minimum coverage provided||INR 50,000||INR 50,000||Feature not available||INR 50,000||INR 50,000||INR 50,000|
|Minimum tenure||2 years||5 years||10 years||5 years||5 years||–|
|Maximum tenure||35 years||30 years||40 years||35 years||40 years||–|
|Minimum entry age||18 years||20 years||18 years||18 years||18 years||18 years|
|Maximum entry age||70 for Jeevan Suraksha and 65 for Jeevan Dhara||60 years||60 years||65 years||65 years||65 years|
|Minimum vesting age||50 years||50 years||50 years||40 years||45 years||50 years|
|Maximum vesting age||79 years||70 years||70 years||75 years||70 years||65 years|
|Additional riders available||Critical illness, Term assurance||Critical illness, Disability benefit, Accident benefit||No additional riders available||Accidental death benefit, Term assurance, Critical illness, Disability rider||Hospital cash benefit, Family income, Accident benefit, Critical illness, Term cover||Accident benefit, Critical illness, Term rider|
The above table sums up conventional pension plans or regular pension plans where the insurance companies will invest all customer investments into government securities and bonds. These government securities and bonds are extremely safe but offer very low returns, which usually range between 5% and 6% annually. As a result of the low return rates, the final maturity value doesn’t look satisfactory. This is where the concept of ULIP or Unit Linked Insurance Plans come in. While the name ULIP explicitly uses the term insurance, they are also available for pension plans. The concept here is simple. Some of the money paid by the customers go into markets with high risks and high rewards and some goes into secured government securities and bonds. The high risk is nullified by high security of government securities and bonds however, risks always remain.
Good part however is that ULIP-based pension plans usually give very high returns over the long term and since pension is all about long term outlook, market linked plans fair better compared to regular or conventional pension plans. So, if you are looking for purchasing a pension plan, consider ULIP pension plans very seriously.
Let us take a quick look at some of the best ULIP pension plans available with major insurance companies in India.
|Parameters of Comparison||ICICI Pru – Lifetime Pension II||Bajaj Allianz – UniGain Easy Pension||LIC – Future Plus||Birla SunLife – Flexi SecureLife II||HDFC Standard Life – Unit Linked|
|Type||Market linked||Market linked||Market linked||Market linked||Market linked|
|Minimum Premium||INR 10,000||INR 10,000||INR 5,000||INR 5,000||INR 10,000|
|Life Coverage||Available||Not available||Available||Available||Not available|
|Minimum Entry Age||18 years||18 years||18 years||18 years||18 years|
|Maximum Entry Age||60 years or 65 years||65 years||18 years||65 years||60 years|
|Minimum Vesting Age||45 years||45 years||40 years||50 years||50 years|
|Maximum Vesting Age||75 years||70 years||75 years||70 years||70 years|
|Sum assured calculation method||Pure accumulation and no sum assured OR sum assured equal to tenure multiplied by annual contribution||Pure accumulation and no sum assured||Annualized premiums’ 5 to 20 times||Regular premium amount multiplied by 10||Fund value plus INR 1,000|
|Expenses in initial years||17-22% for first year and for second year 12 to 15%||For first year 15%||For first and second year 8% to 13%||For first year 21%||For first and second year 8.5 to 22%|
|Expenses post initial years||For 3-10 years just 1%. No further expenses later||From second year, 2% every year||2.5%||From second year, 2% every year||1 % from 3rd year|
|Monthly fixed expenses||20||20||15||35 (+2 if insurance taken)||15|
|Top up charges||For first 10 years 1% of the value of top up and then no charges||2%||1.25%||1%||2.5% for first two years followed by 1% every year|
|Switching charges||First 4 free and then INR 100 for every switch||First 3 free and then greater of INR 100 or 1% of switched value||First 4 free and then INR 100 for every switch||First 2 free and then 0.05% of switched amount||First 5 free and then up to 2% of switched value|
|Fund management charges||1.5% for Maximizer II
1.0% for Balancer
0.75% for Preserver and Protector II
|1.5% for Equity Midcap and Equity Plus
1% for Equity Index
0.70% for Debt Plus and Cash Plus
|1 % for Bond fund
1% for Income fund
1.25% for Balanced fund
1.50% for Growth fund
|ULIP fund options available||Maximizer II, Balancer II, Protector II and Preserver||Equity Index, Equity Plus, Equity Midcap Plus, Debt Plus, Balanced Plus, Cash Plus||Bond, Income, Balanced and Growth||Nourish, Growth and Enrich||Growth, Equity Managed, Balanced, Defensive, Secure, Liquid|
The above table has elements like ULIP fund options, fund management charges, switching charges, top up charges etc. You may not understand them here properly. Honestly, explaining them is out of the scope of this article. All you need to know now is that these funds are actually allocation methods depending on whether you want your money to grow under high risk or you want to take a balanced approach or moderate risk and moderate security etc. All companies have dedicated fund managers who keep a constant tab on market movements and invest wisely to maximize profits and minimize risks in volatile market conditions. The fund management charges applied are for covering the expenses of those fund managers.
Bottom line is clean and simple. The higher the risk you take, the greater is the reward you get. Thus, when you are actually investing in market linked pension plans, you are playing in volatile markets with higher risk ratio compared to regular or conventional pension plans that invest only in government securities and bonds. Because the risk is high, the rewards are also high and in long run, almost every company manages to accumulate higher wealth and hence, provide higher annuity earnings compared to their regular pension plans.
However, before you select an insurance company for unit linked pension plans, make sure that you ask for data related to past performances of their funds. It is usually good to look at, at least 5 years of performance. The further back you look, the clearer the picture becomes about how the funds performed in past.
You will be investing your money. So, take your time to do your homework so that you don’t have to face problems in future and you can enjoy the fruits of your investments in form of pension earnings.
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