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Buying Guide: How to choose the best retirement plans

What you need to know before you start investing in a unit linked retirement plan?

  • Unit linked life insurance plans are different from traditional insurance plans (endowment/participating) and are subject to different risk factors.
  • Premiums paid in unit-linked life insurance plans are subject to investment risks associated with capital markets, and NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market.
  • The insured is responsible for his/her decision in joining the fund.
  • The past performance of the fund is not indicative of future performance.
  • There are associated risks and applicable charges, which one should find out from the insurance agent or the intermediary or the policy document issued by the insurer.
  • The name of the unit-linked life insurance contract does not in any way indicate the quality of the contract, its future prospects, or returns.

Consumer VOICE compared 10 pension plans based on maximum and minimum vesting age, maximum and minimum policy term, minimum premium, maximum and minimum entry age, and charges for premium allocation and many more to know the best pension plan.

 What are the benefits of a retirement plan?

Rise in life expectancy is leading to more number of retired persons in India than ever.  However that does not reduce the expenses on healthcare. Instead it has increased the expense of healthcare for a longer time. Since, there is no social security system in India, aged persons especially from unorganized sectors have to have a financial support to sail them smoothly through their old age.  Hence retirement plans can be one of the biggest financial supports they can depend on.

Income tax exemptions on premium paid, commuted pension received and maturity lump-sum amounts received. under sections 80 (C), 10 (10A) and 10 (10D) of the Income Tax Act, are the added benefits of retirement plans. Detail of each act or section is given below.

How to choose a unit linked retirement plan?

  • Start at an early age and choose a plan that assures you of a guaranteed pension for life (or at least up to 80–85 years of age).
  • Pick a plan that suits your income.
  • Choose a plan that levies least of charges (towards fund management, policy administration, premium allocation, investment guarantee, etc.) so as to ensure that the fund value/net asset value (NAV) is not eroded.
  • You are better off with a plan that offers minimum premium payment so that default does not occur.
  • Choose a plan that provides for partial withdrawal.
  • Choose a plan that provides for maturity lump-sum benefit.

 

What are the Income Tax Benefits of a unit linked retirement plan?

Section 80C

Under Section 80C of Income Tax Act, 1961 (as amended up to date), the premiums paid each year are eligible for income tax deduction (subject to the ceiling of Rs 150,000 per each assessment year), along with other notified securities deduction from gross total income.

Section 10 (10A)

This tax exemption benefit is available on the commuted pension amount that is paid either on the vesting date or on maturity of the policy plan (under Clause 23 AAB).

Section 10 (10D)

Under this section, the maturity benefits you receive under the policy plan (maturity benefit of all premia paid + bonuses paid + any partial withdrawal paid, if any) qualify for income tax exemption as an eligible deduction from your total income.

What are the important terms for you to know about retirement pension plans?

  • Suicide clause

If suicide takes place within 12 months from the date of issuance of the policy, repayment is made to the nominee/legal heirs up to the fund value as on the date of his/her death.

  • Vesting benefit

It is the age at which you choose to start receiving pension the pension regularly from your policy plan in spite of the plan term being longer.

  • Loyalty addition benefit

This benefit is available on meeting two conditions:

  • the life insured is alive on the date of his/her being found eligible to receive this benefit, and
  • all due premiums have been paid up to date without any default

This benefit is usually given for continuing the policy plan till its maturity and is paid by means of a certain percentage of the sum insured at prescribed intervals starting from a minimum prescribed period. It represents a portion of any monetary surpluses of the insurance company after valuation, which is shared with policyholders.

  • Investment guarantee charge

This is a charge levied by most of the insurance companies for rendering the service of guaranteeing returns (say 110 per cent or 105 per cent) on the total premium paid by you.  It is a charge levied as a percentage on the NAV value. This amount is charged only when the policy is in force.

  • Policy administration charge

This is a charge levied on monthly basis from your fund value/by redeeming against accumulated units for the service rendered. Most insurance companies charge this fee; only the rates vary.

  • Fund management charge

This is a charge that insurance companies levy on daily basis. It is charged to you as a percentage of fund value on yearly rests. This charge is for providing the services of the fund manager who will manage your portfolio in allocating your money into various funds as per market forces. This is charged before arriving at the NAV of your investment and that can change daily, albeit marginally, subject to market play. All insurance companies levy this charge.

  • Premium allocation charge

This is the charge collected from the premium that you deposit and is deducted on yearly basis. This enables the company to invest the balance of the premium in units so that you can get better returns (subject to market conditions).

  • Annuity

It is the regular monthly pension payable to you after you cross the vesting age.

  • Accumulation period

This is the period when you pay premiums to accumulate funds for retirement.

  • Sum assured

This is the amount that the nominee receives in the event of death of the insured during the accumulation period.

  • Participating plans

These plans give a share of the insurer’s profit to policyholders. This share is not fixed and depends on the financial performance of the company.

Click to know the Best BUY, Good Buy and Fair Buy recommendations by Consumer VOICE experts and choose the best pension plan for yourself

Divya Patwal

VOICE

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