Before the Insurance Regulatory Development Authority came out with regulations for pension products, these accounted for 20-25 per cent of the business for most life insurance companies. But when the regulator made it mandatory for the insurers to guarantee 4.5 per cent returns on such products, most players withdrew their products as they found the guarantee unsustainable.
Fortunately for insurers, the regulator has relaxed that guarantee requirement. Under the new guidelines for pension policies, insurers have to guarantee a return that is anything above zero per cent.
HDFC Life is the first private life insurer to foray into the pension segment, under the new guidelines. The product is market-linked and gives a guaranteed benefit on vesting and on death. On maturity (vesting), the assured benefit is only one per cent more than the total premiums paid or the fund value whichever is higher. Whereas on death the assured benefit is six per cent of the total premiums paid.
After the accumulation phase is achieved, you have the option to withdraw one third of the accumulated amount which is tax-free. The remaining two-third has to be invested with the same insurer to buy annuity. Under the New Pension Scheme (NPS), although you can withdraw up to 60 per cent of the accumulated amount, it is not tax-free. The amount withdrawn is added to your annual income and you are taxed accordingly.
Under the earlier guidelines, the individual was allowed to shop around for a better rate of annuity, but now the insured has to accept whatever rate the insurer offers. For instance, you want to buy annuity of Rs 10 lakh. Even if the insurer you accumulated this amount with is not offering a good rate, you have no option to switch the insurer. Experts say this could lead to mis-selling, as there are chances that your insurance agent may not tell you about this fact.
Under NPS, you can simply accumulate your corpus and choose any 'Annuity Service Provider' offering better annuity rates. In other words, one is free to choose any insurer outside the existing six pension fund managers.
Currently, HDFC Life is offering annuity rate of 8.5 per cent for a 60-year old. Similarly LIC also offers annuity rate in the range of 7 to 8.5 per cent. This rate can also change every quarter depending on the market returns.
The non-zero guarantee, also works to the advantage of insurers only. This is because, the insurer has no liability to give any fixed returns to the insured. According to G N Agarwal, chief actuary, Future Generali Life Insurance, insurers can generate better returns as they are free to invest long term. With this, they get more flexibility and can perform better. These products are for individuals who have a long term horizon.
Being a market-linked product, the insurer can take exposure in equity to a maximum of 60 per cent, whereas in NPS the limit is 50 per cent. What this means is that while pension policy could generate better returns due to higher equity exposure, the returns could also fall due to the same reason.
When compared to pension schemes offered by mutual funds, these pension plans are more expensive. The total expenses by mutual fund houses cannot exceed 2.5 per cent, where as the mortality, premium allocation and other charges levied by insurers can go well above that.
An NPS is cheap compared to both the insurance plans and mutual fund schemes, however, the annuity rate is important. Suresh Sadagopan a financial planner says, the rate at which annuity is offered depends on the age, accumulated amount and option chosen.