IRDA has made lot of changes in the pension sector in the last 2 years. But instead of making it customer friendly, it is now beneficial only to the insurance companies and the distributors. What has changed in these policies in the last 2 years?
Prior to September 2010
Almost all insurance companies were offering Unit linked pension plans. There were lots of choices of funds to be selected, as per the risk profile of the customer. Customer had the choice to switch between various funds to encash on the market volatility. The customer can keep more money in equities in initial years and can shift towards debt, as he nearer the retirement. Of course, the charges under these policies were high, but lesser than the other ULIP policies on offer. Pension policies were contributing a decent percentage to the total sales for almost all the insurance companies. The customer had the option to commute one – third of the corpus as tax free. If needed, he had the option to withdraw the entire corpus as taxable to meet any contingencies. The customer had the option to opt for annuities from any other life insurance companies, which is offering better rates at that time. Except for the higher charges, these policies were not bad for the customer.
Post September 2010
The IRDA has come out with certain modifications in this sector. It has mandated all pension policies to offer a minimum return to the customers. The return rate was linked to the reverse repo rate of RBI. To start with the rates offered was 4.5%. The fear of offering a guaranteed return prompted almost all the companies to stop launching unit linked pension plans. All companies know that if they have to offer such a return guarantee, they have to limit their investments predominantly in debt instruments. The chances of earning decent returns by investing in long term equities were closed. For the past 1 year, the pension policies were almost out of the market, which used to contribute to around 25% to the total sales earlier.
The insurance companies were lobbying the regulator to withdraw the 4.5% guaranteed return to encash the pension market. Now the regulator has come out with the new set of regulations from Dec. 2011.
What is the new offer from December 2011?
The regulator has allowed the companies to withdraw the offer of 4.5% return on pension policies. Instead of this, the companies have the choice of offering any of the two types of guarantees – minimum return (a non zero, positive return) disclosed at the time of issuing the policy or a specific maturity benefit.
Another major change is that the pension policy holder will have to buy annuity from the same insurance company. Earlier he has the option to go for the companies which offers the best rates in the market.
The next change is that, the facility for lump sum withdrawal either on maturity (Vesting date) or on surrender is done away with. Now the customer can withdraw only one-third of the accumulation in lump sum as tax free and the balance has to be used for getting pension. Earlier taxable withdrawal was permitted which will help the customer in case of any pressing needs.
Why you should stay away from these policies?
You can expect sales calls from insurance agents to hard sell the new version of pension policies. Please keep the following points in mind.
- These companies were not selling pension policies because they were not in a position to offer a 4.5% return. Now they are offering these policies because IRDA allowed them to offer lesser returns. In a country where even Savings Bank rates are almost 4 – 6%, why you should invest in these policies?
- Earlier you had the option to go to any company on vesting date, to purchase the annuity, if they are offering better rates. Now that is not allowed.
- The lump sum withdrawal facility even if is taxable was good to meet any contingency due to health condition etc. Now that is stopped and you have to compulsorily go for an annuity with 2/3rd of your accumulation. The pension is taxable too.
The companies may create sugar coated stories behind these plain truths to market these policies and agents may get a better commission to sell it. Please stay away from them. Once you join, there is no exit route.
Go for a combination of quality mutual funds, PPF etc. as per your risk profile to create a better pension corpus with flexibility and liquidity. These are tax friendly too.