Work hard, save a lot and retire early seems to be the dream of many belonging to the Indian salaried class today. But truth is, even if you manage the first two actions, the third may prove difficult because there are very few pension products available in the market today for those who need a regular income.
After a long hiatus, life insurance companies have recently begun to re-launch their pension plans, with assured returns as mandated by the insurance regulator. But should the new offerings be your investment vehicle for retirement income? We analyse them.
LIC and HDFC Life have recently launched plans that are designed as deferred annuity products. You pay premiums for a number of years to accumulate a corpus. After retirement, the corpus is used to purchase an annuity with the same insurer, which allows you to draw a pension after retirement. While LIC’s is a traditional plan, HDFC Life’s is a unit linked pension plan. A couple of other large life insurance companies too are expected to launch their offerings shortly.
But though they assure capital protection and a minimum level of returns, these products should be considered along with other avenues, if investors are keen to beat inflation. Investors who would like to maximise their returns can consider using a combination of debt-oriented balanced mutual funds, debt funds and the Public Provident Fund, along with the plans of insurers for the purposes of earning a pension.
Assured, but low returns
LIC’s New Jeevan Nidhi is a traditional plan. You pay premiums for a fixed 20-25 years. In the first five years, there is a guaranteed addition of Rs 50 for every Rs 1,000 sum assured. From the sixth year, you would be eligible for bonuses declared by the company.
After the accumulation phase, you would have to buy an immediate annuity product from LIC itself, which would give you a pension at periodic intervals opted for by you. Now, in the accumulation phase, you would get just 5 per cent returns on your premiums for the first five years. After the sixth year, you will be eligible for bonuses.
It being a traditional product, the bonuses declared may typically be 6-7 per cent (on sum assured). These bonus rates are among the highest in the industry. But these are simple additions and don’t earn compound interest.
The overall return at the end of the 20-year period is likely to be around 6 per cent. This return rate may fall short of inflation in the consumer price index, which has been hovering in the 9-10 per cent range over the past four years.
Higher returns on this product are restricted by two factors. The compulsory requirement of assured returns forces these plans to invest in safe instruments with lower yields. You are thus faced with a situation where you have low insurance cover and insufficient capital appreciation to beat inflation.
Alternative
If you are an investor who is averse to taking significant equity risk, you can consider the following option.
Take a term cover from LIC for an amount after calculating your potential income, liabilities and inflation. The premiums are quite low. For a 35-year-old male, a cover for Rs 50 lakh would cost just around Rs 8,000 a year.
For investment purposes, you can open a PPF (public provident fund) account in select banks and all post offices.
The rate for PPF is set annually by the government and is usually linked to government bond yields. The rates over the past few years have been in the 8.5-9 per cent range.
The added benefit of investments in PPF is that it is completely tax free and is also allowed for deduction under section 80C.
If you start at 35, you can invest for 15 years and extend it in blocks of five years, till your retirement.
After retirement, you can consider taking an immediate annuity with an insurance provider who offers the highest rates. Currently, LIC offers the best rates for immediate annuity plans.
ULPPs not attractive
HDFC Life’s Pension Super Plus is a unit linked plan, which too offers assured returns.
In the investment phase you pay premiums regularly till your intended retirement and then purchase an immediate annuity from the same insurer.
The policy assures 101 per cent of all premiums paid as guaranteed return on maturity, which gives a paltry one per cent definitive return.
In case you were to die before the policy term, your nominee will receive the higher of the fund value or 6 per cent per annum addition to premiums paid till that date.
This policy has the mandate to invest 0-60 per cent of its portfolio in equity, making it more risky than traditional plans.
But with assurance of returns, the provider may in practice, invest less than 60 per cent in equity. Hence, over the long term, the returns may still lag inflation rates.
You can withdraw a third of the accumulated corpus (which is tax free) after the accumulation phase and take an immediate annuity or a pension plan with the balance.
Also, as with all unit linked pension products, the charges are high. In the first 10 years, the fund charges 2.5 per cent for premium allocation. Then there are other charges on top of this: fund management (1.35 per cent a year), policy administration (0.4 per cent), mortality and investment guarantee (0.4 per cent).
Again, the insurance component is quite low. It being the first ULPP launched with assured returns, there is no past record to go by from this genre of funds.
Other options
You can invest in a debt- oriented balanced fund, where the charges are quite low (1.4-2.75 per cent) and the asset management company itself would periodically re-balance the portfolio according to market needs.
The other advantage that you have in such funds is that you can sell a scheme if it underperforms and invest in another that has a stronger track record.
You can invest in UTI CRTS 81, FT India Life Stage FoF – 30s plan, FT India Life Stage FoF – 40s plan, if you are keen on a significant equity component.
If you like to play safe with a large debt component, with some equity (20-30 per cent) thrown in for greater returns, you have many options.
These include: HDFC MIP Long Term, Birla Sun Life Monthly Income and Reliance MIP, all of which have delivered 11-12 per cent returns over the past 10 years. Even though long-term capital gains from these funds are taxable, you would still have post-tax returns that are attractive and mostly higher than inflation.
In this case, again, these investments will help you accumulate a sufficient nest-egg, but will not provide you with a regular income after retirement. For that, you will need to seek out an immediate annuity plan from an insurer.
Therefore, this appears to be the best way to plan your pension. Accumulate a kitty through various investment avenues and take an immediate annuity that offers the highest rates when you retire.