The
pension reforms bill is again differed due political compulsion. One should
know that we already have pension plans available in the market offered by the
life insurance companies. IRDA had issued new guidelines for pension plans of
life insurance companies six months back. New guidelines were made effective
from 1st December’ 2011. Six months have already passed, but we have
not heard much about new pension plans being launched. In its earlier circular IRDA has mandated a
minimum guaranteed addition of 4.5% annually in all pension plans effective
from 1.9.2010. Surprisingly most of the insurers have stayed away from
launching any new pension products thereafter finding it difficult to offer any
guaranteed benefits. After tussle with SEBI, IRDA has been forced to mandate
for insurance cover in all pension plans. Now IRDA has again changed its stand
and has set new guidelines for pension plans.
As
pension plans aim to build retirement corpus, it is very important to know and
understand the importance of retirement planning. Improved health facility has
resulted in longer life expectancy. At present life
expectancy of an average Indian is around 66 years and is likely to increase
progressively in future. This has to be addressed
carefully at younger age. The rising trend of nuclear family with no one to
fall back upon has forced the people to seriously think about planning for
retirement. The government is also concerned about this issue and has launched.
NPS (National Pension System) offering tax sops too. IRDA is also trying to
increase awareness for pension plans offered by the life insurance companies.
Now with the increasing awareness in this area, all players are also taking
necessary steps to sell their products. Coming back to pension plans after new
guidelines are issued, one has to assess and weigh following facts before
buying any pension plans from life insurance co.
1)New Pensions plans will be launched as traditional plans, ULIP
plans and also as variable insurance plans. It is very important to know the
features of the plan you are buying. All insurance plans are loaded with
different charges, which can reduce the overall return. IRDA has recently
modified ULIP plans and Variable
insurance plans by restricting the charges but it is still silent on Traditional
plans, which are sold maximum in all categories. One must look at all the
charges levied in pension plans.
2) As
per new norms pension plans may have insurance cover. It is not mandatory now to
have life cover in new pension plans. Insurers may come out with either of the
option i.e. with or without life cover. One has to assess the impact of your
choice before opting for a particular pension plans. It is always advisable to
buy term plan for life cover as the same is the least expensive. Term insurance
is the simplest type of life insurance and easiest to understand. Now online
term plans are also available and are cheaper than regular term plans.
3) One
must also note that there will not be 4.5% annual guarantee in pension plans in
new products. Recently RBI has deregulated interest rates in savings account
and all banks are offering minimum 5.5% to 6% interest on the balance available
in the savings account. Insurers were not ready to offer even 4.5% return p.a.
So you have to check what returns your pension plan will give if you continue
till end and also evaluate whether the same will be sufficient to meet your post retirement expenses or not.
4) Pension
plans are one way traffic so if you once enter you are not allowed to go back
and withdraw your money. Partial withdrawals are also not allowed as per new
norms and also at the end you have to mandatorily buy annuity from the corpus
accumulated. You will be allowed to commute only 1/3rd of the
corpus. Review and rebalancing of your portfolio are most important steps in
any investment decision. Suppose in case you have invested in mutual funds and if
one of your funds is not performing well and is far behind its peers and
benchmark, than you are allowed to redeem from the same and also be able to
switch to another scheme. This is not possible as far as pensions plans are
concerned as you are not allowed to withdraw either partially or fully from the
same nor there is any portability allowed under pension products as of now.
This means you have to continue with the same plan whether it is performing or
not. Thus to me pension plans are neither flexible nor liquid.
5) The
most dangerous provision in the new norms is that you have to compulsory buy
the annuity from the same insurer with whom you have accumulated your
retirement corpus. Previously policy holders were allowed to buy their annuity
from any insurer who is offering good deal. Now you have to stick to the same
insurer whether your insurer is offering you most competitive rate of annuity
or not.
6) Last
but not least, at present pensions plans are allowed as deduction u/s 80-C up
to 1 lakh in line with life insurance premium. But after DTC (Direct Tax Code)
is passed you will get deduction up to 50,000 only instead of 1 lakh which is
available at present. Life Insurance premium is also merged with health
insurance premium and tuition fees paid for 2 children’s for deduction.
One
must take investment decision after knowing and understanding all the features
of the product and take informed decision. Retirement is one of the most
important goals of any individual so one need to be extra careful while
investing for rainy days. After passing of PFRDA bill in parliament we may see
another tussle between PFRDA and IRDA for regulating pension funds.
This article first appeared at myiris.com on 11th June'2012.
