Unit Linked Pension Plans (ULIPs)

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You must have heard the famous saying ”The Challenge Of Retirement Is How To Spend Time Without Spending Money“. You know the perils of retirement ”Plenty Of Time At Hand And No Money To Spend“.You must have seen an advertisement on television in which an elderly retired man tells his wife that post retirement they need to sell their car, send away the cook, and the servant as they cannot afford the expenses. The wife suggests taking money every month from their daughter. The elderly man sternly refuses this option and jokingly tells her that their future has been secured through a pension plan.After watching this advertisement you must be certainly thinking of your future and the need to secure it.You must have heard the phrase ”Better Late Than Never“. So if you have not taken a unit linked pension plan ”Do Not Fret“ .It is never too late to start. Take time off and study those pension plans particularly Unit Linked Pension Plans.

 

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What Is A Unit Linked Pension Plan

You have a unit linked pension plan in which the premiums are paid regularly on a monthly basis. The charges are deducted from unit linked pension plans in a similar way to a Unit linked insurance plan.These plans have a minimum annual premium of INR 10000 and charges are deducted from them. According to new rules a compulsory life cover or a health cover needs to be provided and a minimum guaranteed amount of 4.5% indexed to the RBI reverse repo rate. You will have to pay premiums for about 10-15 years and you will get a third of the corpus on retirement. The remaining amount is locked in a compulsory annuity plan which will pay you sums of money on a monthly, quarterly or an annual basis. These policies have a compulsory lock in period of 5 years. These policies have an entry age of 25-70 Years and an equity exposure which can range from 60-100%.Premium allocation charges are around 3-5% for the first year on the premiums and slowly reduce to 2.5% by the end of the fifth year. Policy administration charges are INR 30 per month .Fund management charges are in the range of 0.7-0.8% on the value of units held.

Rules Governing the Functioning Of Unit Linked Pension Plans

Minimum Guaranteed Amount

You know that according to new rules the insurer has to guarantee a certain minimum return on all the premiums paid or a guaranteed amount on maturity which he must adhere to. This protects the corpus of the investor .If the insurer so desires he can offer an additional amount over and above the minimum amount which might increase with time or a fixed amount which may be equal to or more than all premiums combined .This protects the capital amounts invested by the policy holder. The insurance company can provide insurance protection cover to the policyholder on payment of additional premium called rider benefits as the insurance cover is optional.

Allocation Of The Unit Linked Pension Policies

You know that the Insurance Companies can now fix the minimum guaranteed amounts they would offer you. This frees up essential space to invest in equity. As the guaranteed amount increases the equity exposure of these instruments reduces. These policies need to define the amounts the policyholders will get at all points of time such as on surrender, retirement and death during the course of that policy so that the investor gets a through know how of the product. This means that the insurer needs to set aside a certain guaranteed amount for death benefits and so on and his exposure to equity is severely curtailed. This forces the Unit Linked Pension Plan to focus heavily on debt instruments.

Change In Annuity Schemes

You know that Unit Linked Pension Plans have Annuity plans which give a lump sum on retirement of the policyholder. According to draft guidelines the IRDA suggested Guaranteed Annuity Plans which gives a lump sum on retirement which could be as high as 10% of the premiums paid. Thankfully for the insurers these plans have been disbanded in pension policies.This is because these plans had high guaranteed interest rates .The insurers would have to set aside huge proportions of their funds to guarantee such a rate. They would have to plan for the future at prevailing interest rates and would have to offer higher rates at all points of time even if prevailing interest rates were slashed. Under these Unit Linked Pension Plans one third of your retirement corpus is given to you as a lump sum and two third of the amount is locked in a compulsory annuity plan either with the same insurance agency or this amount is directly transferred to another insurance agency of your choice where it is locked in an immediate annuity plan. Rules are being framed such that the annuity policy has to be locked in with the same insurer you invested the pension policy in order to procure loyalty benefits. This provides a lifelong commitment and discourages surrender and partial withdrawal of the policy. On surrender of the pension policy the maximum charges would be INR 6000 as surrender charges for the first year and if you surrender the policy in the fourth year the surrender charges are capped at INR 2000.

Explaining That Policy

Don’t you find those insurance agents at your doorstep trying very hard to persuade you to pick up that unit linked pension policy? What do you do about it? Do you care to ask them about these products? Now the insurance agents have to disclose all details about that pension policy. They cannot hide anything from you. Isn’t it in your interest to make use of this situation to your advantage? The insurance agents have to compulsory disclose all guaranteed benefits such as surrender benefits, maturity and death benefits in that pension plan. They can only use two rates of return 4% or 8% in order to explain the returns from the pension policy. One signifies the minimum rate and the upper rate is capped at a reasonable rate of 8%.This prevents insurance agents from promising stupendous returns and hooking customers in a policy which can be a lifelong commitment. Whenever you watch a cricket match do you just watch the end result?. Don’t you also track the score at all points of time?. Definitely Yes…Similarly pension plans have to disclose the performance of those plans at least once a year on the first of April. They disclose the amount accumulated under such policies in a similar manner to that of a portfolio of stocks. You are able to measure the performance of that policy and track the returns on a real time basis. Based on the current market and economic conditions future returns and maturity benefits can be predicted. The insurance agencies can use financial modelling and other techniques to predict the future returns based on the permissible values of 4% and 8% rate of interest. This gives a policy holder a concise image and picture of the returns these policies would generate. These unit linked pension policies are still in a start up phase and have a long way to go.

 

Tax Benefits of Unit Linked Pension Plans

 

·         Tax Deductions are available for these policies under Section 80 C of the Income Tax Act up to a sum of INR 1 Lakh.

·         You receive one third of the accumulated amount as a tax free lump sum on retirement and two thirds of the amount is locked in a compulsory annuity policy. The maturity benefits are tax free in the hands of the investor under Section 10 10(d) of the Income Tax Act.

·         These policies are tax deductible under Section 80CCC up to a sum of INR 10000.

·         The amounts invested in an annuity scheme will be taxed if the total amount from the annuity is more than INR 2.5 Lakhs a year.

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