To avail of the tax-saving season, unit-linked pension plans have been launched in a new avatar. HDFC Life Insurance was the first, launching the Pension Super Plus. Plans by ICICI Prudential Life Insurance and Birla SunLife Insurance followed.
Financial planners say they are fielding many queries about these products. Under Section 80C of the Income Tax Act, pension plans qualify for a tax deduction of up to Rs 1 lakh. On maturity, a third of the corpus, which the customer receives as a lump sum, is tax-free; the rest has to be used for buying an annuity product that gives periodic income.
Guaranteed returns from new unit-linked pension plans have become popular. The Insurance Regulatory and Development Authority has asked companies to provide non-zero guarantee on maturity benefits. Earlier, it had asked for at least 4.5 per cent, which led to pension plans disappearing from the market.
However, the guarantee provided is meagre. With the new plans, an aggressive investor is likely to get one per cent guaranteed return. Sample this: ICICI Prudential Life Insurance will pay 101 per cent of the premiums paid till date to an aggressive investor (75 per cent in equity), irrespective of the policy term. A moderately aggressive fund (50 per cent in equity) guarantees 125-150 per cent. And, a conservative fund (25 per cent in equity) would pay 145-190 per cent, depending on the premium payment option, the policy term and the investment option. This return varies between 101 and 140 per cent for Birla SunLife Insurance's product; for HDFC Life Insurance, it is 101 per cent. However, in each of these cases, if the fund value is more than the guaranteed amount, you earn the fund value on maturity.
One per cent return for an investment term of 10 years or more for an aggressive investor (equity investor) is too low. Equity funds can give much higher returns in the same period. According to mutual fund rating agency Value Research, despite the poor market conditions, equity diversified funds gave about four per cent returns in the past five years. Even a five-year bank deposit gives higher assured returns of 8.50 per cent, along with tax benefits.
Conservative investors might find the debt investment option lucrative but through 10, 20 or 30 years, debt products like tax-free bonds and debt mutual funds would yield similar returns. Why, then, should you pay more than other long-term instruments and earn at par?
Mumbai-based certified financial planner Gaurav Mashruwala says there isn't much difference between earlier unit-linked pension plans and new ones, in terms of wealth accumulation.
Typically, financial planners do not recommend pension products for retirement planning. The retirement-planning instruments they favour are the Employees' Provident Fund (EPF), the Public Provident Fund (PPF) and equity mutual funds. The charges by these pension plans are similar to unit-linked insurance plans but higher than those of other products. For instance, Birla SunLife Insurance levies a premium allocation charge of six per cent for the first three policy years. This is lowered by one per cent for the fourth and fifth years and fixed at four per cent from the sixth year. The annual fund management charge for equity funds is 1.35 per cent; for debt funds, it is one per cent. The policy administration charge is Rs 20 for the first five years and Rs 25 from the sixth year, which would rise five per cent every year, subject to a ceiling of Rs 6,000. Also, there is an annual investment guarantee charge of 0.25 per cent of the fund value. Compare this to the expense ratio of mutual funds (0.50 to 2.75 per cent). And, PPF accounts can be opened for free.
Certified financial planner Kartik Jhaveri says the lock-in period is another drawback. Also, only a third of the amount is available on maturity. "Instead, you can invest in an equity fund or a debt fund and time the income as you want. In case of an emergency, it is more difficult and expensive to withdraw from an insurance plan, against mutual funds or bank deposits," he says. One can easily take a look at the 15-year returns data by equity funds. Even if unit-linked pension plans give higher returns through 10, 15 or 20 years, you may still choose other avenues, owing to lower lock-in periods, lower costs and higher liquidity. For tax-saving, too, PPF/EPF and equity funds are equally, if not more, tax-friendly. "By not choosing a pension plan, one would only compromise on tax saving; that, too, if it is required," says Mashruwala.
Typically, if you are contributing towards PPF, EPF, a home loan and a child's tuition fee, you may not need to save any taxes. The new pension norms mandate buying annuity from the same insurer. If it is not the best offer, you are stuck with the same company. Jhaveri says pension plans are advisable only if one is invested in Life Insurance Corporation's Jeevan Suraksha (a traditional pension plan launched in 2000), which assures eight per cent returns, or if one is an indisciplined investor. Otherwise, avoid pension plans, he advises. With 50 per cent investment in equities, minimal fund management charges and average returns of nine per cent, the New Pension Scheme is another good option. One may also consider pension plans from mutual fund houses. One can receive the entire corpus on maturity and either put it in a savings account or buy annuity at the best offered rate.