With the increasing longevity and inflation risks,retirement planning has gained importance over the years. Pensions products by insurance companies along with other options such as New Pension Scheme cater to the need of developing a retirement corpus. Recently,Insurance Regulatory and Development Authority (Irda) came up with a circular which instructs life insurance companies to do away with the current 4.5 per cent guaranteed benefit clause. They have to declare a non-negative guarantee on their pension products. The insurance regulator has made it mandatory for the customers to buy annuities from the same insurer. The guideline would have wide impact on the way pension products are structured and operate in India. Guaranteed benefit Pension products currently have to compulsorily offer 4.5 per cent guaranteed return. The guaranteed return component forced life insurance companies to restrict themselves to fixed income products and cash. For any long term product,equity is considered a must to beat inflation and generate good return. However,fund managers of the pension products could not bet on equities due to its inherent volatile nature. While from a customers point of view the guaranteed of 4.5 per cent is too low to generate any interest as several other competing products are offering much better returns without being locked-in for a long time. Now with no compulsion of 4.5 per cent guarantee,it would be easier for the fund managers to bet on the riskier assets like equity. Now fund managers can make a combination of 30-40 per cent equity and 60 - 70 per cent debt even with a small non-negative guaranteed return. This would help generate much better return,said V Vishwanand,director and head,products and persistency,Max New York Life Insurance. Annuity The increasing life expectancy rate in India creates a risk that the retirees would outlive their savings. Traditional family structures took care of the retirement needs by providing for the financial needs of the retirees. But increasing nuclear family culture makes it imperative for a person to provide for his/ her own retirement needs. It is to provide for the regular payments that pension products have an annuity component. Annuities may be purchased on a deferred or an immediate basis. The phase during which a person invests money is known as the accumulation phase. When the vesting age comes,the corpus needs to be converted to annuities. A person can take out only one third of the total corpus at the vesting age. The two-thirds has to be converted to annuities. The one third of the corpus is available for the tax deduction under the current income tax provisions. The annuities,however,are not tax deductible. Customers would no longer enjoy the luxury of choosing the annuity provider as the insurance regulator has made it mandatory to buy it from the same insurer. Currently almost all the annuities are concentrated with the state insurer,Life Insurance Corporation (LIC),which poses risk for the pension market. Although all life insurance players offer annuities,the one offered by LIC has traditionally been preferred by the customers. The new regulation is aimed at de-risking LIC by forcing customers to buy annuities from the same insurer. Financial experts suggest that current tax provisions do not provide tax benefits on the pension products from insurance companies making them unattractive for investments. Options like PPF,equity diversified mutual funds and new pension scheme look to be better than the pension products. Also they are cheaper as compared to pension products, says Hemant Beniwal of Financial Planners Guild. Investors must follow wait and watch policy till some more clarity emerges on the pension products and then compare and evaluate the offerings by various insurers which are expected in the near future. ritukant.ojha@expressindia.com
