What are unit-linked pension plans?

These are market-linked pension products offered by life insurance companies. These plans are for those looking for long-term retirement plans or investment options. After September 1, 2010, they are supposed to provide a compulsory life or health cover and a minimum guarantee of 4.5 per cent. Earlier, pension plans did not always have an insurance element to it and were primarily an investment vehicle. Being a unit-linked plan, the minimum lock-in is five years. Before this, you cannot surrender the policy. After the September 2010 guidelines, insurers have not launched any such plan as they do not favour the minimum guarantee option. The insurance regulator plans to review norms for this product. It may, however, not compromise on the minimum guarantee.

How does the product work?
These plans work in two phases. They accumulate money (investment) till retirement and then pay one-third of the corpus to the policyholder, investing the remaining in an annuity scheme. The proceeds from the scheme will pay income to the retired on a monthly/quarterly/half yearly/annually basis.

What are the charges levied?
Charges on unit-linked pension plans are similar to those on Ulips – premium-related fee (deducted from the premium in the first year or each year before investing), administrative cost and fund management cost (up to 1.35 per cent). If you opt for a life cover, you will have to pay a mortality fee on your investment. As of now, there aren’t many products in the market. Before September 2010, these plans were very expensive. For instance, ICICI Prudential’s Pru Assure Pension used to charge 100 per cent of the premium as allocation charge in the first year. However, there was no such charge in the subsequent years. The fund management fee was 0.75-1.35 per cent annually, depending on the fund. This is an expensive option for creating a retirement corpus. Instead, investment through mutual funds and going for term and health plans is much cheaper.

How do they differ from traditional plans?
Traditional pension plans are safer products as they invest in government’s fixed income instruments (such as bonds and G-Secs). But, the returns are low. Typically, these policies give six per cent return annually. Unit-linked plans, on the other hand, invest in equity markets and can give very high returns. However, you bear the risks associated with markets.

What are the tax benefits?
Premiums paid towards unit-linked pension plans gets the same treatment as other life insurance products. These qualify for tax exemptions under Section 80C. On retirement, one third of the corpus accumulated through the plan can be commuted tax free. The amount invested in any annuity scheme, received as income every year, will be taxed if the total amount from annuity and other sources is more than Rs 2.5 lakh a year.