What Is a unit linked pension plan?
- In a unit linked pension plan the premiums are paid regularly on a monthly basis. These plans have a minimum annual premium of INR 10000 and charges are deducted from them.
- According to new rules a compulsory life cover or a health cover needs to be provided and a minimum guaranteed amount of 4.5% indexed to the RBI reverse repo rate.
- One has to pay premiums for about 10-15 years and will get a third of the corpus on retirement. The remaining amount is locked in a compulsory annuity plan which will pay sums of money on a monthly, quarterly or an annual basis.
- These policies have a compulsory lock in period of 5 years.
- These policies have an entry age of 25-70 Years and an equity exposure which can range from 60-100%.
What are the charges in a unit linked pension plan?
- Premium allocation charges are around 3-5% for the first year on the premiums and slowly reduce to 2.5% by the end of the fifth year.
- Policy administration charges are INR 30 per month.
- Fund management charges are in the range of 0.7-0.8% on the value of units held.
What are the rules governing the functioning of unit linked pension plans?
Minimum Guaranteed Amount
- According to new rules the insurer has to guarantee a certain minimum return on all the premiums paid or a guaranteed amount on maturity which he must adhere to. This protects the corpus of the investor.
- If the insurer so desires he can offer an additional amount over and above the minimum amount which might increase with time or a fixed amount which may be equal to or more than all premiums combined This protects the capital amounts invested by the policy holder.
- The insurance company can provide insurance protection cover to the policyholder on payment of additional premium called rider benefits.
Allocation of the unit linked pension policies
- Insurance Companies can now fix the minimum guaranteed amounts they would offer. This frees up essential space to invest in equity. As the guaranteed amount increases the equity exposure of these instruments reduces.
- These policies need to define the amounts one will get at all points of time such as on surrender, retirement and death during the course of that policy so that the investor gets a thorough know how of the product.
- This means that the insurer needs to set aside a certain guaranteed amount for death benefits and so on and his exposure to equity is severely curtailed. This forces the Unit Linked Pension Plan to focus heavily on debt instruments.
What are loyalty benefits in a unit linked pension plan?
- Under a unit linked pension plan one third of the retirement corpus is given as a lump sum and two third of the amount is locked in a compulsory annuity plan either with the same insurance agency or this amount is directly transferred to another insurance agency of one’s choice where it is locked in an immediate annuity plan.
- Rules are being framed such that the annuity policy has to be locked in with the same insurer one has invested the pension policy in so that loyalty benefits can be procured. This provides a lifelong commitment and discourages surrender and partial withdrawal of the policy.
- On surrender of the pension policy the maximum charges would be INR 6000 as surrender charges for the first year and if one surrenders the policy in the fourth year the surrender charges are capped at INR 2000.
No false promises
Don’t you find those insurance agents at your doorstep trying very hard to persuade you to pick up that unit linked pension policy? What do you do about it? Do you care to ask them about these products?
Now the insurance agents have to disclose all details about the pension policy. They cannot hide anything about the policy. Isn’t it in one’s interest to make use of this situation to his advantage?
- The insurance agents have to compulsorily disclose all guaranteed benefits such as surrender benefits, maturity and death benefits in that pension plan.
- They can only use two rates of return 4% or 8% in order to explain the returns from the pension policy. One signifies the minimum rate and the upper rate is capped at a reasonable rate of 8%.This prevents insurance agents from promising stupendous returns and hooking customers in a policy which can be a lifelong commitment.
- Pension plans have to disclose the performance of pension plans at least once a year on the first of every April.
- Pension policies disclose the amount accumulated under such policies in a similar manner to that of a portfolio of stocks. One is able to measure the performance of the policy and track the returns on a real time basis.
- Based on the current market and economic conditions future returns and maturity benefits can be predicted.
- The insurance agencies can use financial modeling and other techniques to predict the future returns based on the permissible values of 4% and 8% rate of interest. This gives a policy holder a concise image and picture of the returns these policies would generate.
- Unit linked pension policies are still in a start up phase and have a long way to go.
Tax Benefits Of Unit Linked Pension Plans
- Tax Deductions are available for these policies under Section 80 C of the Income Tax Act up to a sum of INR 1 Lakh.
- One receives one third of the accumulated amount as a tax free lump sum on retirement and two thirds of the amount is locked in a compulsory annuity policy. The annuity paid is taxed in one’s hands on receiving it.
- If one avails a deduction under Section 80 CCC (Pension policy) of INR 1 lakh he cannot avail a deduction under Section 80 C as the combined deduction under Section 80 C along with Section 80 CCC and Section 80 CCD is INR 1 Lakh.
There is a famous saying " To Enjoy A Long Comfortable Retirement Save Today ".Do not postpone that retirement plan. Time and tide waits for no man.