Pension Plan & Annuity have to be from the Same Insurance Company – All pension plans offered by insurance companies are mandated to offer a non-zero positive return of premiums to the policyholder on maturity or to the beneficiary in case of death of the policyholder.
A life insurance company doesn’t sell only insurance policies; it also offers pension plans. These plans help you accumulate a corpus over a period of time and use it to buy an annuity on retirement. An annuity gives you pension for life. Rules dictate that at the end of the tenor, you need to buy an annuity with at least two-thirds of the corpus, and that too from the same insurer. Thus, a pension policy can be divided into two phases—the accumulation phase through a pension policy, and pension phase through annuities. You need to start by understanding a pension plan and how to annuitise the corpus.
What is a Pension Plan?
In a pension plan, you choose to invest your money for a particular period of time. To do this, you can choose from broadly two kinds of pension policies. The first is a unit-linked pension plan (ULPP), which is market-linked, so premiums get invested in funds of your choice, and the costs as well as fund performance are made transparent to you. The second is the traditional plan, which comes with an opaque structure—costs and investment portfolio are not disclosed. These plans either offer a minimum guaranteed return and peg additional returns to bonuses from the participating fund, or offer a guaranteed benefit at the outset.
All pension plans offered by insurance companies are mandated to offer a non-zero positive return of premiums to the policyholder on maturity or to the beneficiary in case of death of the policyholder. Due to this rule, ULPPs don’t typically offer pure equity funds for investment.
At the end of the tenor, the accumulated retirement corpus becomes available to you and you move to the annuity phase.
You can keep only up to one-third of the accumulated corpus; the rest has to be used to either buy an annuity product or a single-premium pension policy. Annuity is a fixed sum that you get every year to provide for pension. There are various types of annuities in the market but all of them come at a fixed rate from the beginning. The rate depends on factors such as type of annuity, your age and the current economic scenario. But once decided, the rate is guaranteed for life.
Earlier, you could shop for an annuity—even if you bought a pension plan from company X, you could annuitise your corpus from company Y. But product regulations of 2013 changed this. The new rule now makes it mandatory to buy the annuity from the same insurer you bought the pension plan from. The aim is to develop the annuity market, as, earlier, insurers offered pension plans but didn’t have annuity products.
In August this year, Insurance Regulatory and Development Authority of India mandated that for annuities falling due on 1 April 2016, customers will have to choose annuity options when buying the pension plan, and not at the end of the accumulation phase. It hopes this will lead to a smooth transition between the two phases, and further develop the annuity market. You have a window to reconsider your decision. Six months before maturity, the insurer will have to inform you about the various annuity options available and the amount under each option. You can rethink your decision.
Source: Live Mint