Top pension plans in India compared

Saturday, March 12, 2011, 12:28 by Business Editor

With majority of people now employed in private sector organisations in India that do not have any post retirement benefits—read pension—it has now become really important that we find an alternative to ensure that there is a monthly payout to take care of regular expenses once we retire.

That’s where Pension Plans come in. These plans leverage the power of ‘compounding’ through your ‘working’ years to generate a large corpus which then generate healthy monthly returns so as to preserve your lifestyle.

So let’s say you want to ensure that you get Rs 25,000 per month once you retire as pension. That means you get Rs 3 lakh a year. Assuming an annual return of, say 7 percent, you’ll need a corpus of Rs 45 lakh to generate the said amount.

Pension Plans are for SECURING your future and not for making you RICH QUICKLY.

Now, to save Rs 45 lakh over lets say 15 years, you need to save Rs 12,500 per month only. That’s what we mean by power of compounding—small sums accumulated over long period with moderate compound interest can produce very large sums.

The rate of return depends on where your pension fund invests money. Equities—stock markets—generate higher returns but come with risk. Debt is relatively risk-free but generates lower returns. Many Pension Plans offer to use a mix of these two and some even allow you to change allocation mid way.

So if you start with a 60:40 equity/debt mix, you can switch to a 70:30 equity/debt mix if you see the markets moving up. It’s generally not advisable to raise the equity component too high because Pension Plans are for SECURING your future and not for making you RICH QUICKLY.

Now that you know a bit about Pension Plans, what are your options on the market? There are plenty you can choose from. We pick a few plans, one of which we believe, should do the job for you.

Aviva Freedom Life Advantage pension plan

The money you put in this pension plan is invested in a combination of debt and equity. Aviva claims the fund will generate a post-tax yield of 8.05%. So if you were to invest Rs 25,000 per annum for 15 years, you should end up with Rs 7.3 lakh. Download the brochure for this pension plan from Aviva (PDF)

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Premium Premium Frequency Tenure Final Fund Value Expected Yield ( Net of all charges ) Yield ( Tax adjusted net of all charges)
Rs 25,000 Yearly, Half-yearly, Monthly 15 years Rs. 7,36,187 8.05% 12.08%

Key Characteristics of Aviva Freedom Life Advantage pension plan

Benefits

•    Death Benefit – In case of the unfortunate demise of the life insured during the tenure of the policy, the nominee will receive the Base Sum Assured or Fund Value (whichever is higher) if the premiums have been paid.

An Accidental death cover, capped at Rs 50 lakh, is also payable if the age of the Life Insured is between 18 to 60 years (based on his most decent birthday) at the time of death and the death occurs due to an accident.

•    Maturity Benefit – On survival till the maturity date, the insured person will receive the Fund Value subject to the payment of regular premiums, top-up premiums and loyalty addition, if any, as on the maturity date.

•    Loyalty Addition Benefit – The insured person gets fund value related loyalty additions through various policy years, as shown in the following table. To get Loyalty additions, you must have paid all the due premiums regularly.

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Partial Withdrawal

Aviva allows you to partially withdraw money from the Fund Value pertaining to regular premiums after completion of first 5 policy years. Similarly, one can redeem his Fund Value pertaining to top–up premiums  after 5 years from the date of payment of each top–up premium. And in both these cases, the insured person must be aged more than 18 years (as on last birthday).

Complete Withdrawal

While the Aviva Freedom Life Advantage pension plan has a lock-in period of 5 years, the policy owner is given the flexibility of withdrawing his money completely at any time after the commencement of the policy. However, remember that if you withdraw during the first 5 years, then the company will deduct an applicable discontinuance charge and return the remainder.

Riders – For the uninitiated, riders are additional components of an insurance policy that extend or restrict the benefits which are otherwise payable, thus providing you with the flexibility to alter the scope of the original plan.

The Aviva Freedom Life Advantage pension plan offers 2 specially designed riders-Aviva Dread Disease Rider and Aviva Term Plus Rider-which one may choose to optimize his protection cover.

The riders can be opted for only during the time of commencement of the policy. The insured individual is allowed to withdraw any rider by submitting a written notice at least 15 days prior to the policy anniversary. Once withdrawn, the rider lapses permanently – with no option for renewal.

As far as joint life policies are concerned, riders if opted are applicable for both the lives insured, each of whom shall be entitled to the rider benefits independently. The table below outlines the coverage term of each rider:

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Aviva Dread Disease Rider – If this rider is opted for, then the rider Sum Assured shall be paid immediately if the insured person suffers from Permanent Total Disability due to illness or accident or contracts any of the specified 18 Critical Illnesses. Plus, the pension plan will continue without this rider.

The critical illnesses covered under the DD rider are: Heart Attack, Major organ transplant, Coronary artery bypass surgery, Stroke, Cancer, Benign brain tumour, Deafness, End stage kidney failure, Blindness, Aorta Graft Surgery, Motor Neurone Disease, Heart Valve Surgery, Paraplegia, Multiple Sclerosis, Coma, End stage liver disease, End stage lung disease and Aplastic Anaemia.

For all the policies issued by Aviva with this rider or any other critical illness rider, the minimum Sum Assured allowed is Rs 2,00,000-with the upper limit set at Rs. 50,00,000.

Aviva Term Plus Rider – This rider pays Aviva Term Plus rider Sum Assured in addition to the death benefit payable under the policy. The minimum Sum Assured allowed under this rider is Rs. 50,000 and the maximum can be up to the base Sum Assured, subject to underwriting.

LIC Pension Plus Plan

The money you put in this plan is invested in a combination of Government/Government Guaranteed Securities, Corporate Debt, Money Market Instruments and Listed Equity Shares.

LIC claims the fund generates a post-tax yield of 8.46%. So if you were to invest Rs 25,000 per annum for 15 years, you should end up with Rs 7.6 lakh. You can find out more about this pension plan from LIC on the company website.

Insurance Provider Pension Plan Premium Premium Frequency Tenure Final Fund Value Expected Yield ( Net of all charges ) Yield ( Tax adjusted net of all charges )
LIC Pension Plus Rs 25,000 Yearly, Half-yearly, Quarterly, Monthly 15 years Rs. 7,62,848 8.46% 12.48%

Key Characteristics of LIC Pension Plus Plan

Benefits

A) Death Benefit:

The Policyholder’s Fund Value shall be payable either in a lump sum or as an annuity (think of it as annual interest income), as desired by the nominee.

So you can get one lump sum amount or the fund will manage your money and give you monthly/quarterly/annual payouts.

The amount of annuity payouts will be conditional upon the payable lump sum and the then prevailing immediate annuity rates (as set by the markets regulator, IRDA) under the annuity option opted for.

B) Benefit on Vesting:

In the event of the policyholder surviving to the date of vesting, LIC will use the higher of his Fund Value and Guaranteed Maturity Proceeds to provide an annuity based on the then prevailing immediate annuity rates under the relevant annuity option.

However, you are provided an option to commute (withdraw) as much as 33% of the Benefit to be paid as a lump sum. The remainder is then used to provide annuity. Moreover, one is free to buy the  annuity from LIC or other life insurer.

Other salient points

Partial Withdrawal –Not Allowed.
Complete Withdrawal – Anytime after the commencement of the policy.
Riders – No such provision

Limitations

The LIC Pension Plus Plan does  not provide any life cover.

Tata-AIG Mahalife Gold Plan

The money you put in this pension plan is invested in a combination of debt and equity. The fund claims it generates a post-tax yield of 8.25%. So if you were to invest Rs 25,000 per annum for 15 years, you should end up with Rs 30.9 lakh! But there is a catch here—the amount assumes an unrealistic maturity period of 100 years. Download a brochure for this pension plan (PDF)

Insurance Provider Pension Plan Premium Premium Frequency Tenure Final Fund Value Expected Yield ( Net of all charges ) Yield ( Tax adjusted net of all charges )
TATA AIG Life Mahalife Gold Rs 25,000 Yearly, Half-yearly, Quarterly, Monthly 15 years Rs. 30,90,600 8.25% 10.9%

Benefits

If you subscribe to this policy for your child, then you have to pay premium for 15 years after which the child will get a guaranteed annual income, as well as coverage for his/her entire life.

The good bit is that Annual Cash Dividends get paid out from the 6th policy anniversary onwards and Guaranteed Annual cash payment of 5% of Sum Assured from 10th policy year onwards. So there is some payout that begins from 6th Year onwards, which is useful. More useful for your child than for yourself.

Limitations

The Tata-AIG Mahalife Gold Plan has an unrealistic Maturity Age of 100 years, making this policy more of a Whole-life Plan rather than a pension plan.

ICICI Prudential Life Stage Wealth II Plan

Key Characteristics of this pension plan

Benefits

Maturity Benefit – At maturity, the Fund Value including the Top up Fund Value, if any, shall be payable. Alternatively, one has the option of going in for the Settlement Option.

Death Benefit-   In the unfortunate event of death of the life assured during the tenure of the policy, the nominee shall be entitled to the Sum Assured plus Fund Value-including Top up Fund Value, if any-subject to minimum death benefit. To find out more about this pension plan, download a brochure

Multiple portfolio strategies – ICICI allows policyholders to select a customised portfolio strategy from several types of investment portfolios (equity and debt).

Flexible premium payment – One can either pay premium throughout the policy term, or for a limited period.

Top-up facility – On top of the regular premiums, you get an option to invest surplus money into this pension plan.

Loyalty additions – Starting from the end of the 10th policy year, subject to the insured having paid all his premiums, a loyalty addition shall be allocated at the end of every policy year.

This Loyalty Addition will be calculated as a proportion of the average of Fund Values on the last day of eight policy quarters preceding the said allocation. ICICI will make the Loyalty Additions by allocating additional units at the end of the year.

An illustrative example with a 20-year policy term is shown below.

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Tax Benefits – On premiums paid and benefits received as per prevailing tax laws.

Partial Withdrawal – Allowed after the completion of 5 policy years.

Limitations – You can’t increase the policy premium under this plan. Also, one can’t take any policy loan against this policy.

SBI Life Unit Plus Super Plan

Key Characteristics of the SBI Life Unit Plus Super pension plan

Benefits

Maturity Benefit –

•    The Fund Value shall be paid as a lump sum, if the Life Assured survives up to Maturity.

•    Alternatively, the Maturity Benefit can be availed in installments under ‘Settlement’ option, which helps you to get periodic tranches of your Maturity proceeds within five years from the Date of Maturity.

During the settlement period, the Fund Value will remain invested in the existing Funds as per the prior allocation. SBI Life won’t levy any other charges except Fund Management Charges & Switching Charge, as applicable.

However, Partial Withdrawals are not allowed during this period. At any point of time, if you ask for payment of remaining Fund Value the same will be paid immediately. In case of death before the end of the settlement period, the company will pay the remaining Fund Value immediately as a lump sum to the nominee/beneficiary (e.g. legal heir).

Life Cover Benefit – Higher of the Sum Assured or Fund Value is payable; with a minimum of 105% of aggregate basic premiums paid till the time of death. Sum Assured and amount equal to 105% of total basic premiums paid till the time of death will be reduced to the extent of Partial Withdrawals made in the final 24 months for age on death below 60 years and for age at death 60 years & above all withdrawals made from 58 years onwards.

For Regular and Limited Premium Paying Term (LPPT) plans, SBI Life levies  no Policy Administration fees for first 5 years, thus enhancing your Fund Value. You can download the brochure for the SBI Life Unit Plus pension plan from the SBI site. (PDF)

No Premium Allocation Charge from 11th year onwards.

Tax Benefit – As per prevailing Tax Laws

Partial Withdrawal – One can partially redeem his money from the 6th Policy Year onwards or on attainment of age 18 by the Life Assured, whichever is later.

Complete Withdrawal – Anytime after the commencement of the plan.

Riders – At the time of commencement of the policy, the policyholder has an option of availing one or more of the following riders:

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Limitations – Number of charges to avail various policy benefits

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2 Comments

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    [...] Well, Life Insurance Corporation’s ‘Pension Plus’ plan is an option you might consider. Launched last September, this unit-linked pension plan is targeted at individuals having a relatively lower risk appetite, who seek to invest funds for their retirement and intend to purchase annuity (read, pension) on maturity or withdrawal of the policy. Also read our detailed story on top pension plans in India [...]

  2. ICICI Pru LifeLink Pension SP ULIP retirement plan, ICICI Prudential pension plans for Indians - DWS Business said on Tuesday, April 5, 2011, 16:51

    [...] And if you want to simply avoid such a scenario from ever arising, then a pension plan is something that you should think of. Also known as annuity schemes, these policies helps one preserve his current lifestyle by giving him a regular income after retirement. Suggested read: Pension plans in India [...]

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