Ch. 9: Things To Keep In Mind Before Investing In Pension Accumulation Plans

In the previous articles, we have learned about what a Pension Accumulation Plan is, how it works, the types, customization options, etc.

As we already know, there are two major types of Pension Accumulation Plans -

1. Unit-Linked Pension Accumulation Plans: These are linked to the stock market and the returns you get depend on the market conditions.
2. Non-Linked Pension Accumulation Plans: These plans give you fixed returns that are predefined in your policy document.

The goal of these plans is to accumulate a substantial retirement fund while you’re still earning. Buying a retirement plan should not be an impulsive decision, since it’ll affect how secure and comfortable your future will be. Hence, it is crucial to carefully study and go through the nitty-gritty details.

There are a few important things that you should consider before finalizing the plan you want to buy! Let’s have a look!

Things you should keep in mind when buying Unit-Linked Pension Accumulation Plans

1. Financial Commitments

a. How much can you invest? A Unit-Linked Pension Accumulation Plan is a long commitment. The money you invest will be locked in for a lengthy and fixed time span - right till you retire.

The maturity benefit, i.e., the retirement fund you’ll receive depends on the number of units you own and their respective market value.

• This market value of the units fluctuates on a daily basis, depending on market conditions.
• Plus, the number of units you own depends on the amount you invest.

The higher your investment, the higher the units you own. You need to ensure that the investment you make should give you ample returns to cover your financial goals.

b. Premium Payment Term Before you buy a Unit-Linked Pension Accumulation Plan, be aware of the number of years you’ll have to pay the premiums for. Check the policy documents for the “Premium Payment Term” before signing them.

c. Be careful of the lock-in period Unit-Linked Pension Accumulation Plans are long-term investment products that are a good choice if you can invest for at least a decade.

These plans have a 5-year lock-in period, during which you cannot withdraw the money you have invested. Stopping premium payment during this period will result in losing the risk cover and you will face monetary losses.

2. Select the fund as per your risk appetite

Unit-Linked Pension Accumulation Plans give you a plethora of fund options that you can invest your money in, from equity to debt to money market funds. You can pick the one that suits your risk tolerance, life stage, and goals.

For instance, if you are young (say less than 40) and you want to begin accumulating a retirement fund. You can pick funds that invest in equity at the beginning of the policy term for better returns. As you move closer to retirement, you can preserve your accumulated amount by moving it into funds that invest in debt instruments.

3. Examine the fund’s past performance

Even though the past track record of any fund doesn’t guarantee its future performance, it’s still prudent to be aware of how the insurance company’s fund performed as compared to other funds in the same category and index. If you can see the fund consistently performing better, you know that your money is in good hands.

Note: This information is generally available on the insurance company’s website.

4. The charges associated with the product

These plans come with a host of charges levied by the insurer, such as the Premium Allocation Charge, Policy Administration Charge, Surrender/Discontinuance Charge, etc.

Since they are generally deducted from the premiums you pay or the units you own, they have a significant impact on the returns you get. Check the charges associated with the plan you want to buy and compare the same with similar plans and investment products.

Note:

• Charges may vary across insurers. Some insurance providers may not levy certain charges as well.
• Check if the product you are purchasing has the Return on Premium Allocation and Mortality Charges feature. At the time of maturity, your insurer will add these charges back to your fund value. Please note that Mortality Charges may not be levied in Unit-Linked Pension Accumulation Plans.

5. Fund Switching

Your risk tolerance changes with time. For instance, imagine that your money is invested in a debt oriented fund. Your risk appetite increases and the performance of equity-oriented funds has gotten better. A Pension Accumulation Plan helps you with just that! It is flexible and lets you transfer the units you own, fully or partially, from one fund to another - so that you can maximise your returns.

You may be charged for fund switching. Remember to check the number of free switches, cost per switch, and flexibility of switches associated with your plan.

Things you should keep in mind when buying Non-Linked Pension Accumulation Plans

1. Calculate the right maturity amount

The maturity benefit payable under a Non-Linked Pension Accumulation Plan is the higher of either -

• The total premiums you pay during the premium payment term along with any accrued bonuses, or
• A percentage of the total premiums you pay. This can range between 101% to 140% - depending on the product you buy.

Ensure that you calculate the maturity amount you will need in the future - before you finalise the plan. Keep in mind the goals and milestones that you plan on fulfilling when you are retired, and factor in inflation too.

2. Financial and premium payment commitments

• A Non-Linked Pension Accumulation Plan is a retirement savings product, and hence, spans decades. The money you invest in it will be locked in for a long and fixed time period, and you will receive the maturity benefit only after the policy term ends. If you happen to withdraw any money while the policy is active, it may result in huge losses.
• Secondly, the premiums of these plans can be pretty high. Factor in the costs you will incur to maintain the policy and pick a plan whose premiums you can afford in the long run. Make sure that you have a stable income so you pay all the premiums on time. Missing out on payments may result in your policy lapsing or converting to a paid-up policy with reduced benefits.

3. Opt for the right premium payment term

There are 3 types of premium payment terms available with these plans -

• Single Pay: You can pay the entire premium amount in one instalment, and enjoy the benefits for the entire duration.
• Regular Pay: You’ll have to pay the premiums until the very end of the policy term.
• Limited Pay: You can also choose to pay the premiums for a limited number of years (5, 10, 15, etc. years) and finish them off in faster and bigger instalments. And, you can enjoy the benefits for the remaining duration. Make sure you choose the option that best fits your budget, to avoid payment lapses.

4. Check the guaranteed and non-guaranteed benefits

• Guaranteed benefits: The maturity benefit and accrued bonus. You’ll surely receive these.
• Non-guaranteed benefits: Variable benefits that depend on several factors, like the insurance company's future performance, economic conditions, etc.

Both these benefits will be detailed out in the ‘benefit illustration’, which you can get from your financial advisor or insurer. Go through it carefully. Purchase the plan only if you think the benefits will be adequate for you and your family in the future.

5. Evaluate the insurance company’s past performance

Another important facet is buying the plan from the right insurer to avoid any hassles in case there’s a problem during the policy term or when it matures.

You should examine -

• The insurance company’s claim settlement record.
• Returns and bonuses given to existing policyholders.
• Reviews by previous customers. This will give you a better picture of how good or bad the insurer’s services are.

Things you should keep in mind that are common between Unit Linked and Non-Linked Pension Accumulation Plans

1. Choose the right policy duration Since these plans accumulate your retirement fund, you should choose a policy duration accordingly. Make sure the policy matures when you’re nearing retirement.

For example - Manish, a 30-year-old male, currently works as a Operations Manager with a reputed company. He plans on retiring when he is 60 years old. When finalising the Pension Accumulation Plan, he should select a policy duration of 30 years - so he can receive the maturity payout as soon as he retires.

2. Select right premium payment frequency You can also select the premium payment frequency, i.e., how frequently you pay your premiums. This can be done on an annual, semi-annual, quarterly, or monthly basis - based on your convenience.

• Choose the annual premium payment option if you can afford paying large amounts.
• Choose the semi-annual, quarterly, or monthly option if you won’t be able to pay large amounts every year.

Please Note - Set up auto-debit or standing instructions on your bank account - no matter the premium payment frequency you choose. This will ensure that your premiums are paid on time.

3. Check the surrender benefits You may want to discontinue or surrender your Pension Accumulation Plan because you aren’t satisfied with it and want to switch to a different plan, you aren’t able to pay the premiums, etc.

Whatever the reason may be, it is of utmost importance to be aware of the losses you will face because of discontinuing the plan - before doing so!

4. Pick riders with your base plan You can enhance your plan’s coverage by opting for add-ons known as Riders by paying a certain extra cost. Adding them to your base plan is very convenient, since you don’t need to go through additional documentation or medical tests.

For instance, in case of accidental death, the Accidental Death Benefit Rider will pay an additional sum of money to your family.

5. Free-Look Period Check the free-look period of your plan. During this period, you can go through your policy document after you have purchased it. Look at the features, limitations, exclusions, etc. If you are not satisfied or feel the policy doesn’t fit your or your family’s needs, you can return it. You won’t have to pay any penalty or cancellation charges.

The T&Cs of the free look period may vary across insurers. Ensure you check them before going ahead and making the purchase.

6. Grace and Revival Period Let’s have a look at what these terms mean -

• Grace Period An additional time period wherein you can pay the premium, without losing your benefits. If you fail to pay the premiums within the grace period, your policy lapses and the benefits cease.
• Revival Period The revival period comes into play after the grace period is over. During this period, you can get your lapsed policy back.

The conditions for both the grace and revival period vary across insures. So, before you go ahead, understand the grace and policy revival period of the policy you’re going to buy.

7. Appoint the right nominee When you buy a Pension Accumulation Plan, you will have to pick a nominee/s. It can be any member of your family - your spouse, children, parents, siblings, etc. The chosen nominee will ultimately receive the death benefit - if you pass away during the policy tenure.

8. Thorough research and comparison Always research and compare Pension Accumulation Plans available with different insurers. Go through the benefits, features, limitations, exclusions, etc. of each plan and the past performance of the insurance companies. This will ensure that you know the complete picture before buying a plan and don’t face any trouble later on.

9. Speak to a financial advisor To make sure that the plan you choose is right for you and your family, you can always speak to a good financial advisor. They will help you select a plan that’s suited to your requirements, and answer any questions you may have. And the best part is that they’ll provide you with end-to-end support, right from policy purchase to filing a claim.

So, these were some important things that you should keep in mind when buying a Pension Accumulation Plan - so you make the right choice and don’t have to go

through any hassles later on. The next step? Choosing where you buy the policy from. Our next article talks about just that!