Industry behemoth LIC (Life Insurance Corporation) rolled out a saral pension plan on August 30. It is an immediate annuity product that pays out a pension for life after payment of a single premium. LIC has just two options in this version of saral pension, making it a relatively simple product.
But are the annuity rates attractive enough? Here’s what you must know before opting to invest in the saral pension scheme for getting regular pension.
Product features
As mentioned earlier, there are two options available for those taking the saral pension option. The first option pays you a pension for life. The purchase price (or the single premium you pay) is returned to the nominee after your time.
The second option gives a pension for your lifetime. In case of an unfortunate event, pension is paid to your spouse for his/her life. After your spouse’s time, the purchase price is paid to the nominee.
You can opt for monthly, quarterly, half-yearly and annual payouts of your pension amount.
The minimum age of entry or the age at which you can opt for the LIC saral pension scheme is 40 and the maximum age is capped at 80.
You can surrender the policy in case you, your spouse or any children are diagnosed with any critical illness. This can be done anytime after six months from the commencement of the policy. You will get 95 per cent of the purchase price as surrender value.
Annuity payouts are added to your overall income and taxed at the slab applicable to you.
Annuity rates and payouts
LIC Saral Pension’s annuities have fairly low payouts from both options. For a person buying the annuity plan by paying ₹10 lakh (plus 1.8 per cent GST) at 60 and taking the option of pension for life, with return of purchase price, the annual payout is ₹58,950. If the second option of joint annuity for life with return of purchase price to the nominee is taken, the annual pension payout reduces to ₹58,250. In both cases, we assume that the main annuitant (person taking the policy) would live till the age of 80. In the second option, it is assumed that the surviving spouse will live for 10 years more after the main annuitant’s time.
The yields in these cases work out to 5.74 per cent and 5.69 per cent, respectively. These yields are quite low compared to many other immediate annuity plans available in the market.
What must investors do?
LIC’s Jeevan Akshay VII, which is also an immediate annuity plan, offers more than 6 per cent annuity yield. As we had noted in an earlier article on immediate annuities, HDFC Life Immediate Annuity, Tata AIA Saral Pension and Kotak Life Immediate Annuity offer annuity rates of 6.58-6.95 per cent.
Therefore, LIC’s Saral Pension clearly lags behind many competing immediate annuity options offered by other insurers in terms of payouts that it offers.
Senior citizens looking for regular income can give this scheme a miss in light of the low yields.
If you must, look at the higher-yielding immediate annuities from other insurers for a part of your regular payouts.
The RBI increased interest rates by 50 basis points on Friday. With a tight liquidity situation prevailing in the financial system, banks and quality NBFCs would increase their fixed deposit rates soon. The rates for some small saving schemes such as the SCSS (senior citizen savings scheme) have already been increased.
Over the next few months, if you can play the waiting game, you would be able to generate safe regular income from a combination of fixed deposits, small saving schemes and RBI bonds. With these instruments you would easily be able to get 7-7.5 per cent returns as interest payouts without taking any risk.