Comparison of Retirement Plans

by Gopal Gidwani on March 15, 2011 · 1 comment

in Financial Planning

Introduction
Life is very uncertain. For the family bread earner unexpected early death can lead the family into trouble. Similarly living too long beyond retirement years can also be a problem. Post retirement the income of an individual stops but his personal and his family expenses don’t stop. During his working life span the individual has to provide for his retirement years so that during retirement years; he along with spouse can continue enjoying the same standard of living which they were doing during pre-retirement years. This is where retirement plans can pitch in to take care of the individual’s retirement years’ expenses.

Life insurance covers the risk of unexpected early death (through term, endowment, money-back, ULIP etc. plans) as well as the risk of living too long (through retirement / pension plans). When it comes to retirement life; all a person dreams of is spending time with grandchildren, meeting friends, indulging self into social activities, going on a pilgrimage etc. How to take care of his expenses and survival is the last thing on his mind during those years. Here retirement plans can definitely come to the rescue. In this article we will explore the different types of retirement plans so that during your retirement years you not only dream of the things mentioned above but actually live your dreams.

What is a retirement plan?
A retirement plan is also known as a pension plan or an annuity plan. This plan is offered by an insurance company to help the individual in saving for his retirement corpus (fund). The annuitant goes on making monthly contributions towards the plan during his working years. The insurance company invests this amount on behalf of the annuitant. This retirement corpus accumulated is then used for purchasing an annuity plan which provides regular monthly pension or annuity during retirement years to the annuitant. An annuitant is a person who buys the annuity plan. During the retirement years the regular payments received by the annuitant from the insurance company are known as annuities.

Phases in a Retirement Plan
Normally in a retirement plan there are 3 phases

Accumulation Phase:
During this phase the annuitant goes on making regular contributions (monthly, quarterly, half yearly or yearly) towards a retirement fund. This money is invested by the insurance company on behalf of the annuitant. This phase is also known as the deferment phase.

Vesting Phase:
This is the second phase after the accumulation phase. During this phase the annuitant does not make fresh contributions. But the contributions already made stay invested and continue earning returns on it. This phase is known as the Vesting Phase. This phase is normally skipped by most people and they move directly from the accumulation phase to the third phase i.e. pension phase.

Pension Phase:
In this phase the annuitant can make a partial lump sum withdrawal from the retirement fund amassed during the first two phases. This is known as commutation. Normally the maximum withdrawal allowed is 1/3 of the total fund. From the remaining corpus the annuitant starts receiving monthly annuities (regular income).

Classification of retirement plans:
Retirement plans can be classified on the basis of where the premium money is invested, when the annuity is received and time duration till which annuity is received.

1) On the basis of where the premium money is invested:
On the basis of where the premium money is invested, retirement plans can be classified into – Traditional Retirement Plans and Unit Linked Retirement Plans (ULIPs). Traditional retirement plans invest most of the premium amount into government bonds and securities. An example of traditional retirement plan is Forever Life from ICICI Prudential Life Insurance. The details of the plan are given below. And on the other hand unit linked retirement plans invest premium into equities or debt or a mix of two based on the investment fund chosen by the annuitant. In unit linked retirement plans the investment risk is borne by the annuitant.  An example of Unit Linked Retirement Plan is Birla Sun Life Insurance (Flexi SecureLife Retirement Plan II). The details of the plan are given below.

a) Traditional Retirement Plans:
Some of the traditional pension plans available in the market are:

FeaturesLIC Jeevan Surksha – IICICI Pru Forever LifeBajaj Allianz Swarna Vishranti
Product TypeDeferred AnnuityDeferred AnnuityDeferred Annuity
Min And Max Age Of Entry18-70 years20 – 60 years18 – 65 years
Min And Max Vesting Age  ( Retirement age)50-79 years50 – 70 years45 – 70 years
Premium  Payment Frequency Quarterly, half yearly, yearly, monthly and under salary deduction scheme.Yearly, half yearly, quarterly, monthly.Quarterly, half yearly, yearly and monthly.
Policy Term2-35 years5 – 30 years5 – 40 years
PremiumRs 2500 p.a.Rs 6000 p.a.Rs. 5000 p.a.
Min   And Max Sum AssuredMin-Rs 50,000Max- No limitRs 50,000Max – No limitRs. 50,000Max- No limit
Provides Life CoverYesYesYes
Tax ReliefTax relief under Section 80CCC on premium paid.Tax relief under Section 80CCC on premium paid.Tax relief under Section 80CCC on premium paid.

 

b) Unit Linked Retirement Plans:
Some of the unit linked retirement plans available in the market are:

FeaturesLIC Pension PlusICICI Pru LifeLink Pension SPBirla Sun Life Insurance ( Flexi SecureLife Retirement Plan II)
Min/Max Age Of Entry18 – 75 years35 – 70 years18 – 65 years
Min /Max Vesting Age40 – 85 years45 – 80 years50 – 70 years
Min PremiumRs. 15,000 p.a. Rs. 5,000 p.a.
Sum AssuredNilNilOptional. 10 times of the regular premium
Switches 2 free switches in  a yearNA2 free switches in  a year
Provides Life CoverNoNoOptional

 2) On the basis of when the annuity is received:
On the basis of when the annuity is received, retirement plans can be classified into – Deferred Annuity Plans and Immediate Annuity Plans.

a) Deferred Annuity Plans:
In this type of plan the regular annuity or pension payment gets deferred (postponed) to a certain period as preferred by the policyholder. These are most suited for young individuals, who have considerable time left before retirement. Most of the retirement plans that are available in the market are deferred annuity plans. During this period deferment period the annuitant keeps contributing in regular small amounts towards the retirement fund. This money is invested by the insurance company on behalf of the annuitant. Bajaj Allianz Swarna Vishranti is an example of deferred annuity plan. During the deferment period, the plan provides the life cover and build up the fund. The deferment period ends at the vesting date. 

b) Immediate Annuity Plans:
In this type of plan a single lump sum premium payment is made by the annuitant to the insurance company. The annuity or pension commences within one year of paying the premium. This type of annuity plan is suitable for those people who have already amassed the retirement fund money. This accumulated amount is handed over to the insurance company and the insurance company invests this amount on behalf of the annuitant and starts making regular annuity payments to the annuitant.

3) On the basis of the time duration till which the annuity will be paid: annuity plans can be further classified as follows:

a) Life Annuity: In this type of annuity plan the annuitant is paid pension throughout life.

b) Life annuity with return of purchase price: In this type of annuity plan the annuitant is paid annuity throughout life. On the death of the annuitant the purchase price is paid back to the beneficiary.

c) Guaranteed period annuity: In this type of annuity plan the annuitant is paid annuity for a guaranteed period of say 5/10/15/20 years and life thereafter. If the annuitant survives this period then the annuity continues till the time the annuitant lives.

d) Joint Life, Last Survivor with Return of Purchase Price: In this type of annuity plan the annuitant is paid annuity till he survives. After the death of the annuitant; annuity is paid to the spouse. After the death of the last survivor (spouse); the annuity purchase price is returned to the beneficiary.

e) Joint Life, Last Survivor without Return of Purchase Price: In this type of annuity plan the annuitant is paid annuity till he survives. After the death of the annuitant; annuity is paid to the spouse. After the death of the last survivor (spouse); the plans closes.

Analysis:

  1. Majority of the retirement plans provide life cover to the annuitant during the deferment period.
  2. During the commutation process, the annuitant can make a lumpsum withdrawal of upto 1/3 of the amount. From the remaining amount an annuity is bought.
  3. If the life assured commits suicide within one year of the date of commencement of the policy, the insurance company will not be liable to pay any benefit. The premiums may be refunded to the nominee.

Conclusion:
Retirement plans are essential for every individual considering the increase in the cost of living to sustain the same standard of living post retirement. Individuals should start retirement planning at an early age as it will help them to build sufficient retirement corpus. Individuals can also take out joint life or last survivor retirement plans, in which the policyholder continues to receive the pension till his death. After his death, his spouse receives the pension.

Unit linked retirement plans can help the policyholder to accumulate higher returns as investments can be done in the capital market as against traditional plans which invest mostly in government securities. On the chosen retirement date, the policyholder can use the amount of accumulated funds to a purchase annuity which will give him regular monthly payouts.

Please let us know your comments by commenting in the section below or write to us at gopal_gidwani@yahoo.com

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