To make insurance products easier to understand and choose from, the insurance regulator has been asking insurers to launch no-frills versions of their popular products. LIC launched its Saral Pension Yojana, a simplified version of immediate annuity plans earlier this month. How does it compare to alternatives in the market?
What it offers
Immediate annuity plans from insurers promise to pay you a lifelong pension in return for an upfront investment, which is called the ‘purchase price’. LIC’s Saral Pension Yojana guarantees pension at a fixed rate throughout your lifetime. This should be distinguished from the bonuses paid on LIC’s participating plans, which can vary based on its surpluses each year.
You can choose to receive your pension from this plan on a monthly, quarterly, half-yearly or annual basis. The pension starts in the immediate period after your purchase. If you opt for a monthly payout, you’ll receive your first pension one month after you make the initial investment.
Any investor between the ages of 40 and 80 can buy LIC’s Saral Pension Yojana. This is a slightly narrower range than allowed by LIC’s older immediate annuity plan Jeevan Akshay VII, which allows investments until the age of 100.
Saral Pension Yojana allows surrender after completing six months, at 95 per cent of the original investment, but only if the policyholder, spouse or children are diagnosed with specific critical illnesses.
While Jeevan Akshay offers the choice of 10 different options, Saral Pension Yojana limits its options to just two. You can opt for a single life plan, where you receive lifelong pension with your initial investment (purchase price) paid back to nominees after your death. Or you can choose a joint life plan, where after your passing your spouse or other dependant receives a lifelong pension. After the death of both annuitants, your nominees get your purchase price.
In offering just two options, the Saral Pension Yojana leaves out some useful features from Jeevan Akshay. In Jeevan Akshay VII, you can lock into joint pensions for a minimum guaranteed period of 5, 10, 15 or 20 years irrespective of whether you survive this period (your spouse/dependant will receive it in case of your death). Jeevan Akshay also offers a pension plan without any return of purchase price.
These additional options help you earn higher monthly income from the same purchase price. For instance, if you choose for option E of Jeevan Akshay with a 20-year pension guarantee, you can expect 19 per cent higher pension than with the joint annuity. Option A – annuity for life without any return of purchase price – helps you earn 20 per cent higher pension than that with return of purchase price. This can be useful for folks who aren’t keen to leave a legacy.
Returns
Your returns from LIC Saral Pension Yojana depend mainly on your age of entry and the option you choose. LIC offers rebates based on the size of your upfront investment.
Returns on annuity plans get better with a higher age of entry. Presently, a 60-year-old buying Saral Pension Yojana will get pension at ₹51650 a year (single life), for a ₹10 lakh investment. For 40 or 50-year olds, this pension drops to ₹50650 and ₹51050 respectively. A 70-year old can expect ₹52500 a year. A 60-year-old would receive only ₹51250 under the joint life option compared to ₹51650 under the single life option.
While agents like to plug annuity plans based on the annuity rate which is at simple interest, it is best to use the IRR (Internal Rate of Return) to judge the true returns from such plans. After considering 1.8 per cent GST on your purchase price, the IRR for a 60-year-old investing in Saral Pension Yojana, who lives until the age of 85 works out to about 5.04 per cent per annum on the single life plan and 5 per cent on joint life, considering the return of purchase price.
Annuity income is taxable at your slab rate, lowering effective returns. Annuity rates on LIC Saral Pension Yojana are lower than those on Jeevan Akshay VII, which offers ₹53950 and ₹53650 for a ₹10 lakh purchase price on comparable single life and joint life options.
On the plus side, immediate annuity plans offer a guaranteed income without longevity risk. They may be suitable options for folks who aren’t good at money management or seek certainty above everything else. While choosing such plans, it is safer to go for insurers who are sure to stick around for as long as you live, even if their annuity rates are on the lower side, as LIC’s are.
But such plans offer far lower returns than other regular income alternatives available to seniors, such as the post office senior citizens scheme (current return 7.4 per cent), monthly income account (current rate 6.7 per cent) and GOI Floating Rate Savings Bonds (7.15 per cent). Once you lock into a certain rate in immediate annuity plans, your pension does not rise with inflation or upswings in rates throughout your life.
If predictable income is your main ask and you are 60, you should maximise your investment in Pradhan Mantri Vaya Vandana Yojana from LIC, upto its ceiling of ₹15 lakh, as it offers a 7.4 per cent return with a shorter 10-year lock-in.
Surpluses can be parked in small savings or bank deposits. Given that we are at the bottom of a rate cycle, waiting for an uptick in rates may fetch you better annuity rates even from immediate annuity plans.