NPS and EPF still better bets than pension plans

MUMBAI: Pension plans offered by life insurance companies haven’t gained momentum compared with the National Pension System ( NPS), Employees’ Provident Fund (EPF) and other instruments, partly due to lack of liquidity and poor returns.

“The yields offered by most pension plans are also not competitive when compared to existing FD (fixed deposit) rates,” said Yashish Dahiya, chief executive of Policybazaar.com.

In immediate annuity plans, there is no liquidity as the entire corpus gets locked in and can’t be withdrawn in case of any emergency.

The Insurance Regulatory and Development Authority had prescribed capital guarantees for all pension plans, banned partial withdrawal and made it mandatory for policyholders to buy annuities from the same insurer.

“Unlike NPS and EPF, there is no open market option available for policyholders investing in pension plans of insurance companies,” said Rajeev Kumar, chief financial officer at Bharti Axa Life Insurance.

“This makes other instruments like NPS more attractive where people have the option of partial withdrawals.”

An insurer offers two types of pension plans — immediate annuity and deferred annuity.

In the first, the retirement corpus a person has saved over his lifetime is used to provide a pension on retirement.

A lump sum is invested so as to start immediate monthly pension payments. On the other hand, a deferred annuity option lets you invest regularly to first build a corpus and once you retire, you get a pension from this amount.

In the case of deferred annuity plan, one-third of the corpus can be withdrawn tax free after retirement, while the rest compulsorily goes toward an annuity. Also, the monthly annuity payable in both plan types is taxable.
The tax laws also treat pension income unfavourably, making it extremely tax inefficient as the entire income is taxable as per the pensioner’s tax slab, thus discouraging a person from buying a pension plan.