Annuity plans are the only insurance company investment products that I dislike. Bond products can serve a purpose in your portfolio that no other investment product (mutual funds, stocks, bank deposits) can fulfill.
And what is this purpose that no other product can fulfill?
Secure / guarantee a source of income for life.
LIC has introduced a new immediate pension plan LIC Saral pension plan (Plan 862).
Let’s find out more about the LIC Saral Pension. Before we get there, let’s take a quick look at the instant retirement plans.
What is an Immediate Retirement Plan?
This is perhaps the simplest product after bank deposits.
You put a capital amount with an insurance company and the insurance company ensures you a lifelong income.
Let’s consider an example: you are 40 years old. You invest Rs 10 lacs in an immediate retirement plan. The insurance pledges say Rs 5,000 a month for your life.
These The monthly income of Rs 5,000 is known in advance and will not change (unless there is an annual income increase option).
Now you can live to be 80, 90, or 150 years old. The insurance company will pay you 5,000 rupees a month until you are alive.
Remember, this promise is made by the insurance company (not the government). If something goes wrong with insurance, that revenue can stop.
Well, we’re talking about a LIC product in this post. So I wouldn’t worry too much about LIC failing.
LIC Saral Pension Plan (Plan No. 862): Important features
- Immediate pension plan
- Single premium: You only have to pay the premium once.
- Available in two versions.
- version 1: Single life annuity with repayment of 100% of the purchase price.
- Variant 2: Joint Life Survivor Annuity with repayment of 100% of the purchase price in the event of the death of the last survivor. You can only buy this variant with your spouse (and no other relative).
- Minimum entry age: 40 years
- Maximum age to start: 80 years
- In the case of a joint life pension plan, the entry age limits apply to Spouse also.
- Frequency of annuity payment: Monthly, quarterly, semi-annually or annually (depending on your choice)
- Option too surrender after 6 months if the investor or spouse or children are diagnosed with a critical illness. You get back 95% of the investment amount.
- Credit facility available after 6 months. The annual interest on such a loan cannot exceed 50% of the annuity payment during the year.
- A GST of 1.8% applies to the purchase price. Let’s say you want to invest Rs 10 lacs. You must pay Rs 10.18 lacs in premium. However, the pension is calculated at Rs 10 lacs.
- 2% discount when you buy the plan online. Your pension payment will be 2% higher if you buy the plan online.
- Slightly higher annuity payment if you invest a lot (> Rs 5 Lacs).
- Receive tax benefits for investments under Section 80C. However, the pension income is taxed at your marginal income tax rate.
LIC Saral Pension: Option 1: Life annuity with purchase price refund
You buy the plan.
You will receive the pension for life.
After your death, the investment amount will be refunded to your nominee.
LIC Saral pension: Variant 2: Joint survivor’s pension with purchase price reimbursement
You buy the plan.
You will receive the pension for life.
After your death, the pension will be passed on to your spouse.
After the death of the spouse, the investment amount is refunded to the nominee.
If the spouse died before you, the amount invested will be refunded to the nominee after your death.
LIC Saral Pension: What are the pension rates?
I am reproducing the sample rates from the LIC website.
A 60 year old will earn an annual income of 52,654 rupees for his life if he invests 10 rupees (10.18 rupees) in LIC Jeevan Saral.
A retirement plan is an income product. Hence, bank deposits, SCSS, PMVVY and PPF are natural competition for this product. However, none of these products guarantee a lifelong source of income. You may not be able to renew your bank FD / SCSS / PMVVY at the current rate.
Since the purchase price (investment amount) is reimbursed to the nominee, the pension rate does not rise sharply with increasing age.
Should you invest in the LIC Saral Pension Plan (Plan 862)?
Let’s look at the good points first.
LIC Saral Pension is a simple product (Saral as the name suggests). Guaranteed income for life. Everything is known in advance. No confusion.
What are the downsides?
First, I don’t understand the reason for introducing such a product. LIC already has an immediate annuity product in LIC Jeevan Akshay VII. And LIC Jeevan Akshay offers the annuity options offered by this product.
Variant 1 in the LIC Saral Pension corresponds to option F in LIC Jeevan Akshay VII and variant 2 corresponds to option J. In addition, LIC Jeevan Akshay VII appears to offer a higher pension rate than LIC Saral Pension (although the information on LIC Jeevan Akshay VII on the LIC website may be out of date).
Second, while pensions are excellent products, you need to buy the right option at the right age. I like pension plans WITHOUT purchase price refunds. Buying such plans at an advanced age can not only increase income, but also reduce risk.
Unfortunately, the LIC Saral Pension does not offer the “WITHOUT purchase price refund” option. Therefore, I am not that enthusiastic about this product.
Please understand that you may have a use case where the LIC Jeevan Saral Pension Plan is a good fit. So make a decision accordingly.
How can retirees earn a high income without taking too much risk?
When to buy a retirement plan?
Retirement provision: How can staggered pension purchases increase income and reduce risk?
Product page on the LIC website