Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

IRDA Makes Insurance a Must For Pension

In the process of the SEBI fight, IRDA has decided it will kill the concept of pension products as pure retirement plans. In it’s recent order:

Based upon the insurance related data as of year ending March 31, 2010 and related
discussions, the Authority issues the following clarifications in continuation of the ULIP
guidelines “Guidelines on Unit Linked Products” issued vide Circular No.
032/IRDA/Actl/Dec-2005 dated 21.12.2005:

A. The following provisions of the said Guidelines are reiterated:
1. Minimum policy term: The minimum policy term shall be five years in the case of
individual products and group products shall continue to be on annually renewable basis.

2. Guarantees on policy benefits: All linked products including pension / annuity products must have a minimum sum assured payable on death, as per the Circular mentioned under Para 7.3 below. In case of unit linked products providing health insurance cover, the provision of death benefit is not mandatory.

3. Loans: No loan shall be granted under Unit Linked Insurance Products.

B. In further clarification on partial withdrawals, the paras 7.3, 8.1, 8.2 and 8.3 of the said ULIP guidelines of December 2005, shall be substituted /modified.

7.3 All top-up premiums made during the currency of contracts must have insurance cover, treating it as single premium, as per Circular No: 061/IRDA/Actl/March 2008 dated March 12, 2008.

8.1 Partial withdrawal is allowed only after fifth policy anniversary for all unit linked products except pension / annuity products. In the case of unit linked pension / annuity products, no partial withdrawal shall be allowed and the insurer shall convert the accumulated fund value into an annuity at maturity. However the insured will have the option to commute up to a maximum of one-third of the accumulated value as lump sum at the time of maturity. . In the case of surrender, only up to a maximum of one-third of the surrender value could be availed in lump sum and the remaining amount must be used to purchase an

8.2 The last sentence “the provisions in this para shall not apply in respect of pension / annuity business” stands deleted.

8.3 Every top up premium shall have a lock in period of three years from the date of payment of that top up premium. However, top ups are not allowed during the last three years of the contract.

All other terms and conditions of the above said Circular and clarifications will continue in force.
The above modifications will come into effect from 1st July 2010.

All life insurers are advised that only the Unit Linked Insurance Products which conform to these revised guidelines shall be permitted to be offered for sale from 1st July 2010.

(Emphasis mine)

Why should pension products have insurance? Insurance is risk protection if you die. Pensions are risk protections if you survive. Very different concepts. But the reason is simple – SEBI and IRDA are defining their regulatory turf. If there is no insurance, SEBI will demand the right to regulate the product, which IRDA doesn’t want.

Another big pain is that pension products will not be easily surrender-able. If you desperately need money, you can only get 1/3rd of your fund value, the remaining is set into an annuity. Heck, that happens even when you retire and you want the money. But in the light of India’s horrible annuity products, this is very anti-investor. You save, and then you can’t even get decent returns on those savings, because you have to buy the crappy annuities.

Even top-ups will need insurance, and are locked in for three years. Four years ago, I used the top-up loophole successfully to avoid high commissions on a pension product I had bought – the premium charges were 10%, but top up charges were just 2%, so most of my money came through a top-up. This will no longer be feasible because of the insurance requirement (my policy has no insurance part).

This basically means there will be MORE mis-selling on pension products. With an insurance edge, a pension product becomes INFERIOR to a Ulip, because of the draconian exit rules. It is therefore better to buy a Ulip than a stupid pension policy from July 1 – in the sense that it is better to get punched in the face compared to getting shot.

If you prefer not to get hit at all, you should simply buy a decent mutual fund or an ETF and sit with it till your retirement. No annuity crap, and if you work with products that pay out dividend, you could have a chunk of money that gives a great yield, and has ample liquidity in case you ever need sudden money.

I am exiting my pension policy today. It’s not a heck of a lot of money but I needed to exit anyway before the DTC took effect and taxed the money, and it’s done a fantastic 10% in four years, a magnificent return of less-than-inflation 2.9% a year annualized. What I bought it for was to reduce wage taxes, mission accomplished, so time to move on.

  • Lump Sum Annuity says:

    >Thanks for sharing such a great information with us….I like it…. and i must agree with thisThe lump sum annuity dilemma has it's own roots in the uncertainty of our life . Once in retirement you may have little opportunity to work for money, should one run out of money before death.Means people closer to retirement are more likely to annuitize than seek a lump sum payment as compare compared to young people.

  • Anonymous says:

    >Does this mean – if you have a pension policy surrender that before 1st July 2010, else get stuck with some involuntary insurance?

  • Deepak Shenoy says:

    >Anon: No, current policies don't change. But I want to get out anyhow, just in case at a later date they decide to make it retrospective.

  • Anonymous says:

    >Dear Deepak,

    As a long time investor (since 1979), I wish to share my experiences/mistakes.

    I too at one time made a mistake of attaching more importance to saving taxes than to grow my wealth. In the process I got struk with dud investments for a long time. I then learnt the hard fact: "don't bother about being smart on saving taxes and being foolish on return".

    It is better to pay a little more tax and earn more with better selection of investments. When I changed my outlook I started to earn much more than I would have trying to save taxes.

    Now I trade in options, shares, commodities and currencies and also make long term investment in Mutual funds (Equities and Debt) without bothering about taxes but keeping sharp eye on market condition to get in and get out. I am very happy that I am making much more with this outlook even after paying taxes.


  • Bhagwad Jal Park says:

    >With the recent DTC, is there any pension plan that will allow me 100% equity? Currently the NPS only allows 50% and that's too low for me since my horizon is 25 years.

    Till now I was investing in 100% equity mutual funds – but with ELSS going for a toss and Long term capital gains being introduced, I'd like a pension product with full equity exposure and tax benefits…

  • Lump Sum Annuity says:

    >I have read your article, I have a question for you. We talk about 2 types of Investments 1. ULIP and 2. Mutual Funds.

    When you talk about ULIP, The maintainance Charges ,Morality Charges , Allocation charges come close to 40% of annual PermiumEg.HDFC Pension Plans. Apart from that they charge every year for maintainace.

    When you talk about Mutual Funds One time entrance fee of 2.5%, no annual charges.