Unit linked pension plans – a useful retirement tool

Today, the responsibility of planning for our golden years is largely on our shoulders – no longer are there guaranteed inflation linked pensions like in the erstwhile government era. With today’s rates of inflation and an increased life expectancy, it is critical to plan effectively for your long term needs and live the desired lifestyle post retirement. Moreover, there is an increased tendency to be financially independent, and not depend on children for money. Thus, a simple but effective retirement solution is the need of the hour. The suggestion outlined below certainly does not solve all retirement worries, but helps in building a sizeable retirement corpus during your earning years.

 

The whole idea behind retirement planning is to set aside a portion of your regular income in a disciplined manner which gets accumulated, through your working years, to provide for your retirement needs. Retirement products, like Public Provident Fund (PPF), provide for accumulation of your savings and return a corpus at the retirement age. Pension products, on the other hand, have undergone a transformation post liberalisation of the insurance industry. Insurance companies offer two kinds of pension plans, namely, Traditional Plans and Unit Linked Plans. Traditional pension plans, typically, are not a good idea because they primarily invest in fixed income securities. The returns are very low, and charges, very high. No doubt they are relatively safe; however they put money in low yield securities that hardly ever beat inflation. Eventually, private insurers started offering Unit Linked Pension Plan (ULPP), thus, opening an attractive avenue for investors to put their long-term money in.

The first point to note is that there is no insurance in an ULPP, though the product is offered by insurers. Even if an insurer offers insurance cover bundled with pension, such a product is best avoided. Insurance is best taken separately from pension planning, through what are called term insurance plans. ULPP is very much an investment product, competing on costs, benefits and returns with mutual funds, deposits, share portfolios, and so on. 

 

In the accumulation phase, the amounts invested go towards purchase of fund units, at prevailing market rates. At retirement, the policyholder is provided with a certain portion of the accumulated corpus (subject to a maximum of one third of the corpus) as a lump sum payment. The remaining corpus is used to purchase an annuity scheme to provide regular monthly income post retirement.

 

In theory, ULPPs have several advantages over mutual funds and stock portfolios:
They bring about discipline and regularity of investing. 
Investors are less likely to view and churn their portfolio frequently, unlike what happens with funds. 
They enjoy tax benefits – while contributions fall under Section 80C, the proceeds are tax free under Section 10(10)D.

But there are some notable disadvantages:
Lack of transparency in fund management and portfolio. 
Less flexibility for investors to move out in case the fund management is poor.

ULPPs, in the past, have been bad for investors, due to their extremely high cost structure, and due to mis-selling by ill informed agents getting high commissions. First year commissions as high as 50-60 per cent have often eaten away any potential gains for the investor from equity upside. However, this is changing now in the wake of investors’ growing awareness and the industry’s maturity. 


Given below is a comparison of a few ULPPs. It is important to note that there are quite a few ULPPs in the market, which have absurdly high fees, or poor performance. Thus, an investor would be well advised to make a thorough analysis of competing products from different providers before making a choice. After all, this is a commitment you will be entering into for a decade or longer, and the decision would have significant impact on your retirement corpus. Many agents have a tendency to push products that give them highest commissions (not necessarily in customer interest), so 'buyer beware' is the best policy to adopt.

 Some points to note from the above table:
There are significant differences in charges between different policies. An unbiased financial advisor (one unaffiliated to a particular product) is best placed to analyse the one best for you, after taking into account the size of the required corpus, the duration and other features desired. 
In almost all policies, costs are largely recovered upfront. Thus, once you enter a policy, it make sense to stick with it for at least a decade. Churning of policies is extremely expensive and counterproductive – it defeats the entire purpose of a ULPP. 
The whole idea is to invest regularly and forget – not falling into the trap of micro-managing investment. Switching after three years is the worst thing you can do – since all costs are front loaded. 
The investment risk is to be borne by the investor, so the anticipated retirement corpus is totally dependent on the fund managers’ ability to manage the portfolio. It is, therefore, important to consider the track record of the fund manager before investing.

Having defined your risk appetite, retirement needs and milestones, you can start saving for a healthy retirement through Unit Linked Pension Plans as it brings in the required investment discipline and accumulates the anticipated sum, compounded at a reasonably high return. Remember, the sooner you start the easier it gets.

- Ramganesh Iyer

The author works with PARK Financial Advisors Pvt. Ltd., Mumbai.