Pension plans of insurance companies may be non-existent in the market at the moment. But that should be little cause for one to worry, and especially for the salaried, feel financial advisors.
Like financial planner Gaurav Mashruwala says, “If you have superannuation plans like an employee provident fund (EPF) or public provident fund (PPF), there is little reason to buy a pension plan.” More so, because pension plans are sold by insurance companies on two main platforms: one, benefits of investment over the long term, and tax benefit.
The latter benefit is not likely to accrue to most salaried, simply because there are too many products under the Section 80C. For instance, there is EPF, PPF, life insurance, children’s education, pension plans and so on. “It is most likely that the Rs 1 lakh benefit will get exhausted with only a few of these instruments, resulting in little or no benefit for the buyer of pension plans,” adds Mashruwala.
Then, there is the rate of return. While the regulator, Insurance Regulatory and Development Authority, has revoked its earlier guideline to pay a minimum rate of 4.5 per cent (or 50 bps per cent above the average reverse repo every quarter), both insurers and financial experts are unsure of how investors could be attracted in a regime when EPF and PPF were offering double the number. Similarly, there were a number of other instruments providing much higher rates. SBI’s one-year fixed deposits offers 9.25 per cent. So, pension plans will have to compete with these safe instruments.
The structure wasn’t also very favourable. Arnav Pandya, a certified financial planner, says that the product sold as pension plans in the past were mostly unit-linked, and consequently, way expensive than other products. Moreover, they had complex cost structures. For instance, there were premium-related fees (deducted from the premium in the first year or each year before investing), annual administrative costs and fund management costs.
Additionally, if you opted for a life cover, you were charged a mortality fee on your investment. In comparison, say you invested in a mutual fund. There is a transaction charge of Rs 100 for investments exceeding Rs 10,000 annually and an expense ratio capped at 2.5 per cent for equity funds. No commission is charged if you invest directly through the fund house.
“For corpus accumulation, it is advisable to invest across asset classes like equities, debt and commodities rather than paying annual premiums for a pension plan,” says Pandya.
There are many ways to do this. “In order to ensure capital protection, insurers will have to increase their debt exposure. This could eat into the returns,” says Suresh Sadagopan of Ladder7 Financial Advisory. Moreover, if one has a small corpus, the investment strategy in the initial years would have to be aggressive which may not be possible for pension plans, adds Sadagopan. Investors can instead look at a mix of equity mutual funds (annual returns = 10 - 12 per cent) and debt instruments (like Public Provident Fund, annual return = 8.6 per cent).
Importantly, these products even score over pension plans on the tax efficiency. Any annuity or premature withdrawal from pension plans is considered income and fully taxable in your hands. So, say you have accumulated Rs 10 lakh through the pension plan and wish to withdraw the amount mid-way, you would have to pay approximately Rs 3.09 lakh (in the highest tax bracket). Even if you hold the plan till maturity, only one-third of the corpus will be tax-free. The rest will be converted into annuity and added to your income.
Comparatively, any gains made on investments in equities for more than a year are fully exempt from taxation. Similarly, interest income earned on PPF investments is tax free.
