Traditional
Pension Plans (Defined benefit pension plan)
A
Traditional Pension Plan is also known as Defined
Benefit Pension Plan. These are the oldest forms ofInsurance
Plans available.
This is the type of pension plan that your father or
grandfather probably had. Your employer puts money
aside for you, manages it, and guarantees you a
specific amount of money for life upon yourRetirement.
The total amount of your pension depends on how long
you have worked and how much money you've earned over
the years. These plans cater to customers those who
like to go with low risk.
In
other words Pension Plans are non-transparent plans,
where the Insurance Company used to invest the fund
withGovt.
securities of
some debt securities, which had very low risk and low
return. During retirement the total accumulated fund
value along with company declared bonus gets added to
the retirement corpus and regular pension are given
from this corpus.
Features of
Traditional Pension Plans
Some of the common features of traditional plans are
mentioned below:
2. Steady
and almost assured returns over the long term.
3. In
most of cases death benefit is Sum Assured +
guaranteed & vested bonus.
4. Helps
in asset creation as they are for a long tenure.
5. Premium
to Sum Assured ratios are fixed for each plan and age.
6. Generally
withdrawals are not allowed before maturity.
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know the Income tax Rate for the assessment year 2009
– 2010
A
traditional Defined Benefit (DB) plan is a plan in
which the advantage on retirement is strong-minded by
a set formula, rather than depending on investment
income. A traditional pension
plan that
defines an advantage for an employee upon that
employee's retirement is a defined benefit plan.
Traditionally retirement
plans have
been administered by institutions which live
specifically for that purpose by large businesses or
for government workers by the government itself. A
traditional form of defined benefit plan is the final
salary plan under which the pension paid is equivalent
to the number of years worked, multiplied by the
member's salary at retirement, multiplied by a factor
known as the increase rate. The final accrued amount
is available as a monthly pension or a lump sum.
The benefit in a Traditional/defined benefit pension
plan is strong-minded by a formula that can
incorporate the employee's pay, years of employment,
age at retirement and other factors. Inflation
throughout an employee's retirement affects the
purchasing power of the pension. The higher the Inflation rate,
the lower the buying power of a fixed annual pension.
This effect can be moderated by providing annual
increases to the pension at the rate ofInflation (usually
capped, for instance at 5% in any given year). This
method is advantageous for the employee since it
stabilizes the purchasing power of pensions to some
extent.
If
the Pension
plan allows
for early retirement, payments are frequently reduced
to know that the retirees will receive the payouts for
longer periods of time. Many Traditional Plans
comprise early retirement provisions to encourage
employees to retire early, before the achievement of
normal retirement age (usually it is 65). Companies
would quite hire younger employees at lower wages.
Some of those provisions come in the form of
additional temporary or supplemental benefits which
are payable to a certain age, frequently before
attaining normal retirement age.
Two types of
Traditional Plans
1. Funded
Plans
In
a funded plan contributions from the employer and
sometimes from plan members are invested in a fund
towards meeting the benefits. The future returns on
the investments and the future benefits to be paid are
not known in advance, so there is no assurance that a
given level of contributions will be sufficient to
meet the benefits. Typically the contributions to be
paid are regularly reviewed in a valuation of the
plan's assets and liabilities carried out by an
actuary to guarantee that the pension fund will meet
future payment obligations. This means that in a
defined benefit pension, investment risk and
investment rewards are classically assumed by the
sponsor/employer and not by the individual. If a plan
is not well-funded the plan sponsor may not have the
monetary resources to continue funding the plan.
2. Unfunded
Plans
In
an unfunded defined benefit pension no assets are set
aside and the profit are paid for by the employer or
other pension sponsor as and when they are paid.
Pension preparations provided by the state in most
countries in the world are unfunded, with benefits
paid directly from current workers contributions and taxes.
This method of financing is known as Pay-as-you-go.
How do they
work?
They regularly begin paying your benefits when you
reach retirement age and stop working. Benefits will
continue for as long as you live. Most defined benefit
plans send you a monthly check. Some give you the
option, instead to receive one lump-sum payment when
you retire.
What is
Vesting?
In
most defined benefit plans, you should participate for
a certain number of years before you have a legal
right to receive the benefits, this is called vesting.
In other words the period during which you are paying
the premium to the company is called vesting period,
after the vesting period you start receiving pension
annuity.
How long you
need to keep yourself insured?
It's significant to ensure that you have sufficient
insurance till the time you are the bread-winner. You
should insure yourself for as long as you think you
would be the crucial bread-winning member of the
family. In most cases your insurance cover should have
a term that matures when you reach the age of 58-65
years, the age of retirement in most professions. That
is the term of your life insurance policy should be
from the age you are at hand up to your planned
retirement age.
For instance, let's assume that you have a family;
your spouse and two kids. Your age is 33. You work at
a software consulting firm at a salary of Rs. 12 lakh
per annum. If you were to take a retirement insurance
policy on yourself now, the vesting period of your
policy should ideally be 65-33 = 32 years.
ULPPs vs.
Traditional Retirement Plans
• Potential
for better returns
• Greater
transparency
• Flexibility
in investment
• Higher
Liquidity (Better exit options):
Potential for
better returns
Under IRDA guidelines, traditional plans have to
invest at least 85% in debt instruments which outcome
in low returns. On the other hand, ULIP’s
invest in market connected instruments with varying
debt and equity proportions and if you wish you can
even choose 100% equity option.
Greater
transparency:
Unlike Ulip’s, in a traditional life insurance policy
you are not aware of how your money is invested, where
it is invested and what is the value of your
investment. But in traditional plan u will be able to
know all these details
Flexibility
in investment:
The top most benefit which Ulip’s offer over
traditional plans is the flexibility accessible to you
to customize the product according to your needs.
-
Flexibility to invest the money the way you want
-
Flexibility to change the fund allocation
-
Flexibility to invest more via top-Ups:
-
Flexibility to skip premium
Flexibility
to invest the money the way you want
Unlike traditional plans, Ulip’s permit you full
discretion to decide the fund alternative most
appropriate to your risk appetite.
Flexibility
to change the fund allocation
Ulip does also give you the option to change the fund
allocation at a later stage throughout fund switching
facility.
Flexibility
to invest more via top-Ups
Unlike traditional plans where you have to invest a
fixed premium every year, Ulip’s allow you flexibility
to invest more than the regular premium via top-ups
which are additional investments over and above the
regular premium. For the purpose of tax deduction
under section 80C, there’s no differentiation between
regular premium and top-ups. In other words top-ups
are also permitted deduction under section 80C.
Flexibility
to skip premium
In
case of traditional plans, you have to pay premium for
the entire duration of the plan. And if by chance you
skip even a single premium, your policy lapses.
Whereas ULIPs permit you the flexibility to stop
paying premium generally after three policy years.
Higher
Liquidity (Better exit options)
The possibility to withdraw your money before maturity
(through surrender or partial withdrawals) is higher
in case of Ulip’s as compared to traditional plans and
also the exit costs are lower.
Ulip’s are different and of course better than
traditional products; however, while in traditional
plans your role is a passive one controlled to just
making premium payments, Ulip’s need your active
involvement. You’ve to make a lot of decisions such as
deciding about sum assured and premium to be paid,
choosing between type I or type II Ulip making a
choice among various fund options available and also
deciding about fund switch from time to time based on
your needs, risk appetite and market outlook.
How much
pension do you need?
In
retirement planning, you need to calculate backward to
figure out how much you should invest - with or
without tax breaks. First, ask yourself when you wish
to retire. Then, what kind of income do you need to
maintain your present standard of living.
If
you think you need Rs 10,000 a month (pre-tax) if you
were to retire today, assuming a 6% inflation rate,
you would need Rs 17,908 after 10 years, Rs 23,965
after 15 and Rs 32,071 after 20 years. If you assume a
more benign inflation rate of, say, 4%, the required
amounts would be Rs 14,802, Rs 18,009 and Rs 21,911
after 10, 15 and 20 years of saving.
You will then need to talk to your Pension
Plan advisor
and figure out what you need to put away every year to
achieve your targeted pension income. We have to, of
course, assume that taxation will be indexed to
inflation - in which case your post-tax income 20
years from now will be similar in real terms to what
it is today for a pension income of Rs 10,000 per
month.
Steps
involved in determining the requirement for Retirement
Plan
Step 1: It
is very significant to work out the intended expenses
after retirement. Planned expenses vary from
individual to individual and from one city to another.
Step 2:Listing
of present wealth and investments gives an indication
of the gap accessible between the actual earning
potential and the preferred expenditure
Step 3:After
identifying this gap plan investments hence which take
closer to your preferred expenditures
Step 4:The
risks concerned in these future investments are of
fundamental consideration.
Step 5: A
constant review of available investments helps to mix
and match future retirement income plans.
Retirement advantage investment plans are offered by
banks, non-banking financial institutes and government
agencies. In many countries post offices also expand
retirement investment plans.
Comparison of
Traditional Pension Plans
Below given table can help
you to make a Comparison between
some of the major traditional Pension Plans.
|
Product Name
|
Birla Sun Life Flexi
Secure Life Retirement Plan II RP
|
ING Life Golden Life Plan Regular Premium
|
Bajaj Allianz Future
Secure Plan
|
ICICI Life Stage
Pension Plan
|
|
Minimum Premium
|
5,000 p.a.
|
15,000 p.a.
|
6,000 p.a.
|
15,000 p.a.
|
|
Maximum Premium
|
Information Not Available
|
No Limit
|
No Limit
|
Information Not Available
|
|
Minimum Term
|
Information Not Available
|
Information Not
Available
|
5 Years
|
10 Years
|
|
Maximum Term
|
Information Not Available
|
Information Not
Available
|
40 Years
|
62 Years
|
|
Minimum age at Entry
|
18 Years
|
18 Years
|
18 Years
|
18 Years
|
|
Maximum age at Entry
|
65 Years
|
65 Years
|
60 years
|
70 Years
|
|
Vesting Age
|
Minimum it is 50 and Maximum it is 70 Years
|
Minimum it is 45
Years and Maximum it is 75 Years
|
Minimum it is 40 Years and Maximum it is 70 Years
|
Minimum it is 50 and Maximum it is 80 Years
|
|
Death Benefit
|
Fund Value
|
Sum Assured along
with the Fund Value
|
Sum Assured along with the Fund Value
|
Fund Value
|
|
Surrender
|
Can be Surrendered after completion of 3 Policy
Year
|
Can be Surrendered
after completion of 3 Policy Year
|
Can be Surrendered after completion of 3 Policy
Year
|
Can be Surrendered after completion of 3 Policy
Year
|
|
Top Up option
|
Minimum Top Up will be 10,000
|
Minimum Top Up
will be Rs. 5000
|
Minimum Top Up will be Rs. 5000
|
Minimum Top Up will be Rs. 2000
|
|
Tax Benefit
|
Tax Benefit is under section 80CCC and 10(10D)
|
Tax Benefit is
under section 80CCC
|
Contributions made and proceeds received will be
eligible for tax deduction as per applicable tax
laws
|
Tax Benefit is under section 80 CCC
|
|
Top up premium allocation charges
|
1%
|
2%
|
2%
|
1%
|
|
Premium Allocation Charges
|
With Out Life Cover - 1st year it is 21.0% and
year onwards 2.2%, With Life Cover - 1st year it
is 23.0% and 2nd Year onwards 3.7%
|
If the premium is
less than or equal to 5 lacs for 1st year it is
18.0% 2nd year it is 4.5% 3rd to 20th year it is
2% and 21st year onwards it is 1%, If the premium
is greater than 5 lacs and less than or equal to
15 lacs 1st year it is 16.5%, 2nd Year it is 4.5%,
3rd to 20th year it is 2% and 21st year onwards
1%, premium greater than 15 lacs 1st year it is
15.0%, 2nd year it is 4.5%, 3rd to 20th year it is
2% and 21st year onwards 1%
|
On 1st year it is 20% and 11th onwards no charges
|
There is no premium allocation charges
|
|
Fund Management Charges
|
The charge will not exceed 1.5% per annum of the
Fund Value
|
Pension Debt Fund
- 0.75%, Pension Equity Fund - 1.50% and Pension
Liquid Fund - 0.50%
|
1.75% p.a. of the NAV for Equity Growth Pension
Fund and Accelerator Mid-Cap Pension Fund and Pure
Stock Pension Fund, 1.25% p.a. of the NAV for
Equity Index Pension Fund II and Allocation
Pension Fund, 0.95% p.a. of the NAV for Bond
Pension Fund and Liquid Pension Fund
|
Pension R.I.C.H. II, Pension Flexi Growth, Pension
Flexi Balanced, Pension Multiplier Fund, Pension
Balancer - 2.25%, Pension Protector - 1.50%,
Pension Preserver - 0.75%
|
|
Policy Administration Charges
|
Rs. 35 per month
|
Rs. 50 Per Month
|
Rs. 630 Per Month
|
This charge will be levied only for the first 10
policy years
|
|
Surrender Charges
|
1st year it is 75%, 2nd year it is 50%, 3rd year
it is 25%, 4th year onwards Nil
|
1st year it is
30%, 2nd Year it is 15%, 3rd Year 10%, 4th Year it
is 5%. 5th Year it is 2.5% and 6th year and
thereafter 1.0%
|
Information Not Available
|
3rd Year it is 92%, 4th Year it is 94%, 5th year
it is 96%, 6th year it is 98%, 7th to 9th year it
is 99%, 10th year onwards it is 100%
|
|
