Saral Pension promises higher liquidity than existing plans: Details here

Surrender, loan options will encourage those wary of illiquid annuities

The Insurance Regulatory and Development Authority of India (Irdai) has asked life insurers to offer a standard immediate annuity plan named Saral Pension. The regulator has already made standard plans mandatory in categories like term, health, and travel.

Limited variants

Immediate annuity plans (where you pay an amount, called the purchase price, and start receiving a pension immediately) of most insurers have six-eight variants, making it difficult for customers to choose the right one. Saral Pension will have only two. The first will be life annuity with 100 per cent return of purchase price (RoPP). Here, pension will be paid to the annuitant for his lifetime. On his demise, the entire purchase price will be returned to the nominee or heir.

The second option is the joint life annuity with 100 per cent RoPP on the last survivor’s death. Here, pension will first be paid to the primary annuitant. Once he passes away, his spouse will get the same amount of pension. And once the spouse passes away, 100 per cent of the purchase price will be returned to the nominee or heir.

Simplicity

Saral Pension will make it easier to purchase an annuity. “Uniformity in terms of features and benefits will make it easy for customers to understand this product,” says Tarun Chugh, managing director and chief executive officer, Bajaj Allianz Life. Adds Sanjay Tiwari, director–strategy, Exide Life Insurance, “This plan will encourage more people to invest in an annuity for a secure pension after retirement.” Arnav Pandya, founder, Moneyeduschool, says with plans of all insurers offering the same features, price comparison will be easy.

Six months after commencement, the purchaser can surrender this plan in case he, his spouse, or child is diagnosed with a critical illness (list will be specified in the policy document). The customer will get 95 per cent of the purchase price back. “People are reluctant to buy annuities because they are not liquid. The defined surrender value is a welcome feature,” says Vivek Jain, head of investment business, Policybazaar.com. In existing plans, only a few offer the surrender option, and the amount returned is lower—about 75-80 per cent.

Customers will be able to take a loan against this plan after six months. “Existing annuity plans don’t offer this feature. It will improve the liquidity of these plans further,” adds Jain.

Its simplicity could curb mis-selling. Deferred annuity plans are being sold currently with the promise of a high rate of return. “What the seller omits to tell is that this rate of return will be paid after, say, 10 years. In that case, the internal rate of return works out to be much lower,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.

Rate of return could be lower

The fact that Saral Pension offers only two variants is also its weakness. “I advise my clients to purchase annuity plans without RoPP, as they offer higher returns. That option is not available here,” says Raghaw.

Saral Pension could pay a lower rate of return than the existing plans of insurers. “Insurers can offer those rates because they can lock in the money in longer-duration government securities. But if they have to offer liquidity, they will not be able to do so, and may be constrained to offer lower returns,” says Jain. Pandya is optimistic that competition will force insurers to offer good rates.

Buyers who want a better rate of return, and are not keen to leave a legacy for their heirs, may avoid Saral Pension and go for a plan without RoPP option.