The top unit-linked pension plans

In our later years, most of us want to realise our unfulfilled dreams, which had been kept in cold storage all through the years of working life. But without enough money a long life, in effect, a long retired life, would be a wasted blessing.

Life expectancy of Indians has gone up from 57.4 years in 1991 to 63.9 years in 2007, but an urban mass affluent is expected to live for 80 years or more. We are yet to wake up to this reality. Only through regular accumulation of funds for retirement in the three or four decades of working life can one accumulate enough funds for two or more decades of retired life.

Long retirement periods and spiralling costs, especially of healthcare, mean that one has to look beyond provident fund money and have other fund sources to maintain living standards.

Pension plan basics

For those who realise the importance of saving for retirement but are unable to act on it, life insurance pension plans can work wonders by bringing in the much needed investing discipline. Pension plans typically require regular premium contributions.

Based on the investment performance of the company, one accumulates a corpus at the end of the plan tenure or at the vesting age. Thereafter, one can pick a portion of the corpus as lump sum, often up to 33 per cent of the total amount, and receive the rest in the form of regular monthly income or annuities. Depending on one's choice, the monthly income arrangement can be from the same company or a different one.

Why unit linked pension plans (ULPPs) are better. Earlier there were only participative pension plans where one's final retirement corpus from the plan depended on the various bonuses declared by the company. The company bore the investment risk.

Most such plans had some form of guaranteed returns because of which companies were conservative in investing and the corpus had limited growth. Now, the guarantees are lesser and are available only for a part of the plan's tenure, say 3-5 years.

Given the emerging realities, an option that gave higher growth possibilities was needed. Unit-linked pension plans (ULPP) do this and various players have launched ULPPs in the past few years.

Like other Ulips, in ULPPs a part of the premium is used to pay for one's life cover (some plans do not carry life cover and, hence, mortality charges are not deducted) and the remaining amount, after deductions for charges such as fund management, policy administration and others, gets converted into units.

The net asset value (NAV) of the units grows with the company's investment performance, even as one keeps adding to the investment pool with premiums. On retirement, one gets a part of the amount as lump sum (up to 33 per cent) with the remaining amount as annuities for a certain period or for life.

In ULPPs, the investor bears the investment risk, which depends on the debt-equity mix of the plan. In return for the higher risk, the investor gets the benefit of higher investment growth in the long-term than what participative policies offer, especially from equity exposure.

Also, unlike participative plans, with ULPPs one gets to know the investment performance through regular disclosures. One can also increase investment amounts with top-ups or switch to a lower or a higher risk variant of the plan on expectation of market turbulence, especially when one is nearing retirement.

With ULPPs one can adjust to other changing situations also. For instance, delaying retirement by forwarding the vesting age.

Given the kind of growth possibilities and flexibility ULPPs provide, it is an ideal instrument for those in the 25-50 years age bracket. The question now is, which one? Here's a step-by step guide.

Picking the right pension ULIP

Fix a retirement age. This will give you the vesting age or, in effect, the tenure of the ULPP. The policy you finally choose should ideally allow you to advance or delay this age.

Go for a pure investment product. Try to choose a plan that doesn't have a life cover as this means that a greater portion of your premium will go towards growth investments.

Choose high equity exposure. Inv- esting in a high equity exposure plan, 80-100 per cent, is the best way of exploiting the growth opportunity that ULPPs offer. This will give your retirement funds the much needed growth kicker. As you approach retirement, you can switch to a lower-risk, higher-debt variant.

Seek the lowest cost option. Costs relating to management and administration bite off a part of the growth of your money. Lower charges reduce the impact of costs on total returns.

The twist, however, is that companies structure or spread their costs differently during the tenure. Plans from the same company can have different cost structures. To get around this, speak to agents of various insurers and get the illustration benefits based on your parameters.

For example, at your age, for a particular term, for a certain amount of premium and rate of return (not higher than the 10 per cent stipulated by Insurance Regulatory and Development Authority), compare the final corpus from different plans. This will give you an idea of which plan has the least cost.

Compare fund performance

Juxtapose the illustration figures with the fund performance to examine whether a given ULPP can deliver what it is promising. Of course, you need to factor in two things. One, that ULPPs have a short track record right now. Two, the equity exposure of the variant you are invested in, as, over longer periods, higher exposure should translate into higher returns.

Once you have done this, your evaluation exercise is complete and you can now zero down on the ULPP of your choice.

Reports from Anand Rawani