In this plan comparison, just investing in a Nifty ETF and getting 1/10th lower returns than thei pension plan’s advertised 10% gives you a 37% higher “pension” than the pension plan.

Outperformance by sitting around and working three formulas on an excel sheet. In fact, if you take real world investments, you would outperform by about 70%.

What I didn’t mention: the flexibility of doing it yourself is that you can also increase investments when you have money, and stop it when you need money.

Update: P V Subramanyam on Subramoney said I missed out on something important. And guess what: He found out: What happens if the person dies after 5 years of retiring? The remaining money goes to Max New York Life! Meaning – they offer this as a pension for life WITHOUT return of principal, which makes the plan EVEN more bad, in comparison with the g-sec investment. (where, if you die, your next-of-kin inherits the bonds, the cash flow and can do what they want with it).

Links:

• Max New York Life Advert Link
• The Pension plan mentioned: Smart Invest Pension Super
  • Product brochure
• More DeepakShenoy Talks Videos

This post is written by Deepak Shenoy, at Capital Mind.

Based upon the insurance related data as of year ending March 31, 2010 and related
discussions, the Authority issues the following clarifications in continuation of the ULIP
guidelines “Guidelines on Unit Linked Products” issued vide Circular No.
032/IRDA/Actl/Dec-2005 dated 21.12.2005:

A. The following provisions of the said Guidelines are reiterated:
1. Minimum policy term: The minimum policy term shall be five years in the case of
individual products and group products shall continue to be on annually renewable basis.

2. Guarantees on policy benefits: All linked products including pension / annuity products must have a minimum sum assured payable on death, as per the Circular mentioned under Para 7.3 below. In case of unit linked products providing health insurance cover, the provision of death benefit is not mandatory.

3. Loans: No loan shall be granted under Unit Linked Insurance Products.

B. In further clarification on partial withdrawals, the paras 7.3, 8.1, 8.2 and 8.3 of the said ULIP guidelines of December 2005, shall be substituted /modified.

7.3 All top-up premiums made during the currency of contracts must have insurance cover, treating it as single premium, as per Circular No: 061/IRDA/Actl/March 2008 dated March 12, 2008.

8.1 Partial withdrawal is allowed only after fifth policy anniversary for all unit linked products except pension / annuity products. In the case of unit linked pension / annuity products, no partial withdrawal shall be allowed and the insurer shall convert the accumulated fund value into an annuity at maturity. However the insured will have the option to commute up to a maximum of one-third of the accumulated value as lump sum at the time of maturity. . In the case of surrender, only up to a maximum of one-third of the surrender value could be availed in lump sum and the remaining amount must be used to purchase an
annuity.

8.2 The last sentence “the provisions in this para shall not apply in respect of pension / annuity business” stands deleted.

8.3 Every top up premium shall have a lock in period of three years from the date of payment of that top up premium. However, top ups are not allowed during the last three years of the contract.

All other terms and conditions of the above said Circular and clarifications will continue in force.
The above modifications will come into effect from 1st July 2010.

All life insurers are advised that only the Unit Linked Insurance Products which conform to these revised guidelines shall be permitted to be offered for sale from 1st July 2010.

(Emphasis mine)

Why should pension products have insurance? Insurance is risk protection if you die. Pensions are risk protections if you survive. Very different concepts. But the reason is simple – SEBI and IRDA are defining their regulatory turf. If there is no insurance, SEBI will demand the right to regulate the product, which IRDA doesn’t want.

Another big pain is that pension products will not be easily surrender-able. If you desperately need money, you can only get 1/3rd of your fund value, the remaining is set into an annuity. Heck, that happens even when you retire and you want the money. But in the light of India’s horrible annuity products, this is very anti-investor. You save, and then you can’t even get decent returns on those savings, because you have to buy the crappy annuities.

Even top-ups will need insurance, and are locked in for three years. Four years ago, I used the top-up loophole successfully to avoid high commissions on a pension product I had bought – the premium charges were 10%, but top up charges were just 2%, so most of my money came through a top-up. This will no longer be feasible because of the insurance requirement (my policy has no insurance part).

This basically means there will be MORE mis-selling on pension products. With an insurance edge, a pension product becomes INFERIOR to a Ulip, because of the draconian exit rules. It is therefore better to buy a Ulip than a stupid pension policy from July 1 – in the sense that it is better to get punched in the face compared to getting shot.

If you prefer not to get hit at all, you should simply buy a decent mutual fund or an ETF and sit with it till your retirement. No annuity crap, and if you work with products that pay out dividend, you could have a chunk of money that gives a great yield, and has ample liquidity in case you ever need sudden money.

I am exiting my pension policy today. It’s not a heck of a lot of money but I needed to exit anyway before the DTC took effect and taxed the money, and it’s done a fantastic 10% in four years, a magnificent return of less-than-inflation 2.9% a year annualized. What I bought it for was to reduce wage taxes, mission accomplished, so time to move on.

This post is written by Deepak Shenoy, at Capital Mind.

(Annuity: Pay a lumpsum now and receive a fixed income for the rest of your life)

This is the return for a 50-lakh rupee annuity, purchased at age 60.

LIC provides an annuity that returns your entire purchase price ('principal’) to your next-of-kin when you die. This – as you can see above – provides a return of 7.50% or so per year. And the income is taxable.

Let’s look instead at buying a 25 year government bond – the principal is protected and returned at the end. The bonds are available for a yield of about 8.30% – which means for a 50 Lakh purchase, you can get back 4.15 lakhs per year (again, taxed).

All LIC has to do is buy 25 year maturity government securities and rake in the Rs. 40,000 per year extra that they make. That’s equivalent to paying 11% commissions, every single year!

A counter argument is that LIC is getting paid “managing” the money. Bollocks. This is ONE BLOODY TRADE, that’s it. What if the person lives to beyond the 25 year term, you ask? (Since LIC has to field that risk) First, average Indians do not live up to 85 years old (which is when the product matures) and last, the rollover trade to higher maturities is very possible without a loss. And 11% to do this? Excuse my sputtering, but this is frikking ridiculous.

[Annuities are important if you are considering the New Pension Scheme (NPS). At retirement (60) you will need to buy an annuity with 40% of the corpus. ]

Good business if you can get it, though. But in the face of competition have private insurers not tightened things up?

Most other insurance companies don’t offer this kind of “return of principal” – they just take your money and give you a pension till you die. When you die (and in some cases, when both you and your spouse die) the money flies to the big hole in the sky. Rates of return for such annuities vary from 5.8%  to 9.7% per year; the maximum I could see for a 60 year old was about 4.87 lakhs per year at LIC. (50 lakh purchase). Some private insurers offer just 5% returns, so forget the “competition” business.

How does this work? They could buy Government bonds and for the excess return (above 8.30%) redeem a part of the investment and pay the annuity. The average Indian is expected to live till around 65 years of age. Even if you consider an average lifespan of 75 , the “redeem the excess” strategy will leave Rs. 30 lakhs as the insurer’s profit when the pensioner dies.

(This is assuming the insurer just buys government bonds, just so you can understand how profitable the business is. You can get this kind of return yourself, with very little effort. Insurers have better options and much higher return capabilities beyond the above mentioned bits.)

Like I said, good business if you can get it. It’s time we got a financial player that really squeezed the margins and provided good products. If we get rid of overheads – excessive commissions and other bull – paying less than 1% a year as intermediation costs will become a reality. Financial products are usually sold, not bought; but it doesn’t mean that will not change (“Selling” means commissions, means higher cost and all that). It is truly unfortunate that doing this business requires so much money upfront – becoming an insurer, for instance, needs a net worth of Rs. 100 cr.  - or I would be doing it. It’s an option I have explored, is on the radar and currently out of my reach financially. But I’m biding my time.

This post is written by Deepak Shenoy, at Capital Mind.

But let's have a closer look. Let us put the Rs.2,000 per month in a bank fixed deposit (FD) at a nominal 8% interest compounded annually. That makes Rs.24,000 annual investment in FD. For the next 30 years, let us assume that the interest rate remains constant at 8%. The Rs.24,000 per annum investment at 8% will accumulate to Rs.29.36 lakhs.

This amount (Rs.29.36 lakhs) if reinvested again in FD at 8% interest will give annual interest of Rs.2.35 lakhs or a monthly interest of Rs.19,575 for life. Now compare with this the Rs.15,315 per month ICICI's Retirement Plan. The FD comprehensively beats the returns of ICICI by a massive Rs.4,260 per month (21.8% more). And don't forget that the FD return is more or less guaranteed where as ICICI's 10% return in risky and market dependent (it could be less, or more). Also, the accumulated Rs.29.36 lakhs is preserved for passing on to the next generation

If you consider the same 10% return, then the amount you make, annually compounded after 30 years, is 39.47 lakhs. (Ganesh has wisely taken a more sane fixed return of 8%, but I'm illustrating how much you're being robbed). That, invested in an FD or govt. bond at 8% yield, gives you an income of 26,319 a month. Glee. 40% more than the "insurance" option. Not just that, your family gets to see the entire money should you die.

And there's the flexibility - need some extra money for hospitalization, to start a business or anything of that sort? With ICICI's annuity, you have no options to withdraw a big lumpsum. In option 2 - where you manage your own money - you can do what you want.

ICICI's retirement plan - and to be fair, every single insurer's retirement plan - is a waste of time. Simply buy long term FDs, long term government bonds or growth gilt funds; the return is far superior. If you want tax savings, get into a term plan and buy an ELSS mutual fund; anyway they will not last much longer (the tax saving nature of them).

Ganesh's post is eye opening and I will do a post on the crappy annuity plans we have, on another day. That alone is enough to never ever recommend the New Pension Scheme to anyone I know; because it's your money they don't allow you to touch.

This post is written by Deepak Shenoy, at The Indian Investor's Blog.