Unit-linked pension plans may lose charm

Life cover to be bundled with pension plan from July.

Unit-linked pension plans may not be the best option for your post-retirement needs, as the Insurance Regulatory & Development Authority (Irda) has made life cover mandatory with these products from July.

Compared to retirement products offered by mutual funds and New Pension Scheme (NPS), unit-linked pension plans have become more expensive.

For instance, the fund management charge on pension products offered by insurance companies is 1.35 per cent of the difference between the gross and the net yield, while on NPS, it is 0.09 basis points per annum. This charge is 2 per cent on pension plans offered by mutual funds.

“NPS is the cheapest pension plan in the market. Mutual funds come next, followed by unit-linked pension plans. In case of NPS, there is no track record, while UTI and Templeton have been around for some time,” said Amar Pandit, a certified financial planner with My Financial Planner.

Other fee, such as administrative and allocation charges, are as high as 30-35 per cent in the first year for unit-linked insurance plans. Similarly, in case of NPS, the cost comes to Rs 300 for every Rs 2,000 invested. This includes the cost of opening an account, which is Rs 50, the annual maintenance charge of Rs 350 and a per transaction charge of Rs 10.

“We prefer pension products of mutual funds and NPS over those offered by insurance companies,” said certified financial planner Gaurav Mashruwala.

Another drawback of unit-linked pension plans is that partial withdrawal is not allowed during the policy term. Though a person cannot withdraw even from NPS, he can do so in case of critical illness, for buying a house and for some other purposes. The maturity proceed in pension plans are divided into two parts. One-third is withdrawn as lumpsum and the rest is used to buy annuity. The latter part is taxed. The policy term is chosen by policy holders for products offered by life insurers, while under NPS, it is fixed at 60 years.

Under NPS, after the term gets over (60 years), a person can only withdraw 60 per cent of the corpus as cash, while the rest can be used to buy an annuity. Like pension products of insurance companies, one can withdraw funds in two tranches.

While no partial withdrawal is allowed during the term of the policy in case of unit-linked pension plans, if a person withdraws before 60 years in NPS, he needs to immediately buy an annuity with 80 per cent of the money accumulated. There are only two retirement plans available from mutual funds — UTI Retirement Benefit Plan and Templeton India Pension Plan. Funds can be withdrawn at 55 and 58 years, respectively.

Both NPS and pension plans of insurance companies offer a choice of investment plans and are managed by professional fund managers. NPS, though regulated by the pension regulator, does not have any government guarantee or security. A person can invest 50 per cent of the total invested amount in equity under NPS and 40 per cent in case of a mutual fund pension plans, while there is no limit in case of insurance-linked pension plans.

With new norms kicking in from July, returns on pension plans offered by insurers are likely to come down by up to two per cent. For instance, if a 35-year-old person now pays Rs 10,000 premium for a pension plan, the entire sum goes for investment. From July, Rs 70-100 will be used for covering his life and the rest will be invested. Apart from t his, a part of it will be used for health check-ups.

“There is a cost for the insurance cover. If the premium on pension plans is used to provide the insurance cover, returns will definitely come down,” said Aegon Religare Life Insurance Appointed Actuary KS Gopalakrishnan.

“Mortality charges are not very high, so the returns may not see any significant impact. The death benefit will be an added advantage for pension plans,” said Bharti Axa Life Insurance Vice-President (Products & Customer Management) Rishi Mathur.

Industry experts believe pension may not be as attractive as earlier because of the insurance element attached to it. “Worldwide, pension is an investment product and not a life cover. Clubbing the two is not the right thing to do. It will lose its charm,” said an insurer.