Coming soon: Standard pension plan. Should you opt?

The Insurance Regulatory and Development Authority of India (Irdai) has asked life insurers to offer a standard immediate annuity plan from 1 April. The standard annuity product will be named Saral Pension, preceded by the company’s name. All life insurance companies will have to mandatorily offer this product from the next financial year. This will be a single premium, non-linked non-participating immediate annuity plan. The annual amount that is guaranteed by an insurance company against the deposited amount by consumers is called an annuity.

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In its circular Irdai stated, “Indian life insurance market currently has several individual immediate annuity products marketed by life insurers, with each product having its own features, terms and conditions and annuity options. With a view to having uniformity across Insurers, and to make available a product by all Life Insurers that will broadly meet the needs of an average customer, it is felt necessary to introduce a standard, individual immediate annuity product, with simple features and standard terms and conditions. Such a standard product will make it easier for the customers to make an informed choice, enhance the trust between the Insurers and the insured, and reduce mis-selling as well as potential disputes.”

Types of annuity options

As per Saral Pension Plan, only two annuity options – single-life annuity, a joint-life annuity will be available to the insurer.

Life Annuity with Return of 100% of the Purchase price (ROP): Under this option, Annuity is paid for the life of the annuitant. In addition, 100% Purchase Price will be returned to the nominee/legal heirs on the death of the annuitant.

Joint Life Last Survivor Annuity with Return of 100% of ROP on the death of the last survivor: In this case, the annuity is first paid to the annuitant for life. After the death of the annuitant, if the spouse is surviving, the spouse continues to receive the same amount of annuity for life till his/her death. Subsequently, on the death of the spouse, Purchase Price shall be payable to nominee/legal heirs. However, if the spouse has pre-deceased the annuitant, then on the death of the annuitant, the Purchase price shall be payable to the nominee/legal heirs.

Modes of annuity payment

Monthly, Quarterly, Half-Yearly and Yearly.

The minimum annuity will be Rs 1,000 per month, Rs 3,000 per quarter, Rs 6,000 every six months and Rs 12,000 per annum. There is no maximum cap. As per the Irdai guidelines, “The payments will be in arrears only, which means that the first annuity payment will start after the modal duration; for example, after three months in case of quarterly mode. Modal factors to be derived with an interest rate consistent with pricing rate of interest.”

The minimum age at entry is 40 years, while the upper age limit is 80 years.

Policy pricing

The pricing – or annuity rate/return on the amount invested – will be determined by the insurers. However, the rates will be linked to purchase price bands – less than Rs 2 lakh, Rs 2-5 lakh, Rs 5-10 lakh, Rs 10-25 lakh and Rs 25 lakh and above.

Loan facility

The loan can be availed any time after six months from the date of commencement of the policy. The maximum amount of loan that can be granted under the policy shall be such that the effective annual interest amount payable on loan does not exceed 50% of the annual annuity amount payable under the policy.

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Under the joint-life option, the loan can be availed by the primary annuitant and on the death of the primary annuitant, it can be availed by the secondary annuitant. The interest on the loan will be at 10-year G-Sec rate per annum as on 1 April, of the relevant financial year, as published by Financial Benchmarks India Pvt Ltd (FBIL), plus not more than 200 bps and will be applicable for all loans granted during the period of twelve months, beginning 1 May of the relevant financial year.

Saral Pension Plan

Premium Payment Option: Single Premium
Types of annuity options: 2 (Single, joint)
Minimum annuity: Rs 1,000 per month
Maximum annuity: No limit
Minimum age: 40 years
Maximum: 80 years

Benefits payable on death

In case of a single life annuity, 100 per cent of the purchase price would be paid to spouse or nominee.

In the case of a joint-life annuity:

a) The spouse would continue to receive the same pension for life. A 100 per cent purchase price would be payable to the nominee or legal heirs on the spouse’s death.

b) However, if the annuitant is a widow or a widower, the purchase price would be payable to the nominee or legal heirs if the policyholder expires.

Maturity benefit

There is no maturity benefit under the product.

Should you opt for it?

The IRDAI has done a great job in simplifying the annuity products, but before opting for it, you need to compare it with other retirement income options. The interest rates on annuities are lower so one should not put all their retirement corpus in annuities.