The essence
of sound financial planning is to manage affairs in such a manner that
money works for you, you don't work for money. This dictum should become
a reality when you cross 50. And one way to ensure this is by investing
in a pension plan that gives you financial independence after you retire.
Before finding out which pension plan suits you best, you must decide
how much pension you want and at what age. For this, you need to prepare
a household budget and cash flow chart based on current expenses and future
commitments. Only then will you be able to compute how much money you
would need as pension, say, 20 years from now.
A consequential advantage of taking a pension plan is that it brings
down your tax liability. Under Sec 80 CCC of the Income Tax Act, contributions
of up to Rs 10,000 to a pension plan are deductible from an individual's
income for the year. However, the pension received would be added to the
income of the recipient. No standard deduction of any type is permissible
on the pension amount received. In spite of this, pension schemes are
a popular investment avenue, especially among those in the highest income
slab.
Till last year, only the Life Insurance Corporation of India (LIC) was
selling a pension policy, Jeevan Suraksha. Now private insurers like ICICI
Prudential Life Insurance and HDFC Standard Life Insurance also have pension
plans called ICICI Pru Forever Life and the Personal Pension Plan. An
individual can take a pension plan at any age after 18. The maximum vesting
age (the age when the plan matures) ranges from 60 to 65 years. At the
time of vesting, the individual has the option of taking 25 per cent of
the corpus as lumpsum while the remaining 75 per cent is invested and
the interest income paid as pension. The Forever Life plan from ICICI
Prudential and the Personal Pension Plan of HDFC Standard Life also have
options under which the policyholder is allowed full withdrawal after
the vesting date.
Significantly, there is no guarantee on the return because that can
be defined only by the prevailing interest rate at that time. Even the
size of the corpus is not assured because that would depend on the interest
rates that prevail over the years. Since the economy is now in the process
of moving away from the administered interest rate regime, interest rates
are expected to go down even further. This will affect the size of the
corpus as also the monthly income from pension. The insurance companies
compute the size of the corpus and the pension earned on the basis of
an indicative rate of 7-7.5 per cent. This indicative rate has been approved
by the Insurance Regulatory and Development Authority. When the policyholder
dies, his nominee or legal heir is given the invested corpus back in lumpsum.
Pension plans also double as life insurance policies. In case of Forever
Life, if the policyholder dies before the vesting date, his nominee is
paid the assured sum by ICICI Prudential Life Insurance. Both LIC and
HDFC Standard Life Insurance offer life cover and non-life cover options
too. The life cover options have a higher premium.
A simple comparison of the premium payable for a 20-year plan from the
three insurance companies (see table) clearly shows that HDFC Standard
Life Insurance offers the cheapest option. The premium payable under the
ICICI Prudential Life Insurance's Forever Life plan is slightly higher
and is the highest in case of the Jeevan Suraksha scheme from LIC.
Subhash Lakhotia is a tax and finance consultant based in Delhi.
He can be reached at slakhotia@satyam.net.in.
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ISSUE APRIL 1, 2002
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