Annuity plans are the only investment products from insurance companies that I do not dislike. Annuity products can serve a purpose in your portfolio that no other investment product (mutual funds, stocks, bank fixed deposits) can serve.
And what is that purpose that no other product can serve?
Ensure/Guarantee an income stream for life.
LIC has launched a new immediate annuity plan LIC Saral Pension Plan (Plan 862).
Let’s find out more about the LIC Saral Pension. Before we get there, let’s take a quick look at immediate annuity plans.
What is an Immediate annuity plan?
This is perhaps the simplest product after bank fixed deposits.
You invest a lump sum with an insurance company and the insurance company provides you an income for life.
Let us consider an example: You are 40 years old. You invest Rs 10 lacs in an immediate annuity plan. The insurance promises say, Rs 5,000 per month for your life.
This Rs 5,000 monthly income is known upfront and won’t change (unless there is an annual income increment option).
Now, you may live until the age of 80, 90, or 150 years. The insurance company pay you Rs 5,000 per month until you are alive.
Remember, this promise is given by the insurance company (and not the Government). If something goes wrong with the insurance company, this income can stop.
Well, we are talking about a LIC product in this post. So, I wouldn’t worry much about LIC failing.
LIC Saral Pension Plan (Plan no. 862): Important Features
- Immediate annuity plan
- Single premium: You have to pay the premium just once.
- Available in two variants.
- Variant 1: Single Life Annuity with return of 100% of purchase price.
- Variant 2: Joint Life survivor Annuity with Return of 100% purchase price on demise of last survivor. You can buy this variant only with your spouse (and no other relative).
- Minimum Entry Age: 40 years
- Maximum Entry Age: 80 years
- In case of Joint Life Annuity plan, the limits of entry age shall apply to spouse too.
- Annuity payment frequency: Monthly, Quarterly, Half-yearly or annual (as chosen)
- Option to surrender after 6 months if the investor or spouse or children is diagnosed with a critical illness. You will get 95% of the investment amount back.
- Loan facility available after 6 months. Annual interest on such loan shall not exceed 50% of annuity payment during the year.
- GST of 1.8% shall apply on the purchase price. Let’s say you want to invest Rs 10 lacs. You will have to pay Rs 10.18 lacs in premium. However, the annuity will be calculated on Rs 10 lacs.
- Rebate of 2% if you purchase the plan online. Your pension payment will be 2% higher if you buy the plan online.
- Slightly higher pension payment if you invest big amount (> Rs 5 lacs).
- You will get tax benefit for investment under Section 80C. However, the annuity income will be taxed at your marginal income tax rate.
LIC Saral Pension: Variant 1: Life Annuity with Return of purchase price
You buy the plan.
You get the pension for life.
After your demise, the investment amount will be returned to your nominee.
LIC Saral Pension: Variant 2: Joint Life Survivor Annuity with return of purchase price
You buy the plan.
You get the pension for life.
After your demise, the pension continues to the spouse.
After the demise of the spouse, the investment amount is returned to the nominee.
If the spouse predeceases you, the investment amount is returned to the nominee after your demise.
LIC Saral Pension: What are the annuity rates?
I reproduce the sample rates from the LIC website.
A 60-year-old will earn an annual income of Rs 52,654 for life if he invests Rs 10 lacs (Rs 10.18 lacs) in the LIC Jeevan Saral.
An annuity plan is an income product. Therefore, bank fixed deposits, SCSS, PMVVY and PPF are natural competition to this product. However, none of these products guarantee an income stream for life. You may not be able to renew your bank FD/SCSS/PMVVY at the current rate.
Since the purchase price (investment amount) is returned to the nominee, the annuity rate does not increase much with increase in entry age.
Should you invest in LIC Saral Pension Plan (Plan 862)?
Let us first look at the good points.
LIC Saral Pension is a simple product (Saral as the name suggests). Guarantees income for life. Everything is known upfront. No confusion.
What are the drawbacks?
Firstly, I don’t understand the reason behind launching such a product. LIC already has an immediate annuity product in LIC Jeevan Akshay VII. And LIC Jeevan Akshay has the annuity variants offered by this product.
Variant 1 in LIC Saral Pension is same as Option F in LIC Jeevan Akshay VII and Variant 2 is same as Option J. Additionally, LIC Jeevan Akshay VII seems to offer a higher annuity rate than LIC Saral Pension (although the information about LIC Jeevan Akshay VII on LIC website might be dated).
Secondly, while annuities are excellent products, you must buy the right variant at the right age. I like annuity plans WITHOUT return of purchase price. If you buy such plans at an advanced age, you can not only increase income but also reduce risk.
Unfortunately, LIC Saral Pension plan does not have the “WITHOUT return of purchase price” variant. Therefore, I am not very keen on this product.
Please understand you may have a use-case where LIC Jeevan Saral Pension plan is a good fit. Therefore, decide accordingly.
Additional Links
How Retirees can generate high income without taking too much risk?
Retirement Planning: How Staggering annuity purchases can increase income and reduce risk?
4 thoughts on “LIC Saral Pension Plan (862): A New Immediate Annuity Plan from LIC: Review”
Nice post Deepesh.
I did not understand your comment ” And what is that purpose that no other product can serve?
Ensure/Guarantee an income stream for life.”
Can we not achive same with mix of high allocation fixed-income basket (PPF,debt funds,FD,post office) and low allocation of of equity (active and index equity funds) ?
Is not that better option in terms of returns and liquidity than annuity plans?
Thanks
Hi Prashant,
Thanks!
I am not comparing annuity product with a diversified portfolio. Only saying there are things that a diversified portfolio can’t do.
With FD/equity etc, there is no guarantee that your portfolio will last for life.
With an annuity plan, you can lock in interest (income) for life. Can’t do this with any other product.
Ran a few scenarios on LIC Akshay options, but should apply here as well. Please correct me if I’m wrong. On average, a 10 lakh plan will either fetch an annual annuity of ~65k until death or ~54k until death + principle returned. I’ve factored in the 2% rebate for annuity values. Let’s call them Option 1 and Option 2.
Essentially, it would take ~ 15 years to make back the principle in Option 1. Inflation adjusted (5%), it would take ~30 years. Let me repeat, the company is taking 30 years to return your own principle (inflation adjusted) to you! Compare that to Option 2, where at any point you’re (well, your nominee) is getting your principle back (even inflation adjusted). In fact, your return is 10.55 lakhs (starting from Year 2) and marginally inches higher each year.
So, return of purchase price plans (like these saral pension plans) make a lot more sense. Unless you really hate your kids and want to squeeze that extra bit of annuity for yourself. 😉
Hi Manyu,
Thanks for the detailed response.
I get your point.
In my opinion, there is no one-size fits-all solution when it comes to investments.
No other product guarantees you income for life apart from annuities. Long term govt. bonds may come close but still no guarantee for life. And income for life can be an important requirement for many investors. Therefore, while the choice of an annuity plan may seem sub-optimal, it can be useful for many investors.
When it comes to annuities, you need to purchase the right variant at the right age.
Buying annuity at a young age may not seem a good idea.
However, once you start touching 70, the annuity plan WITHOUT return of purchase price does look attractive (much higher than any safe fixed income product will offer).
Btw, if let’s say one can assure income for life by investing 50% of portfolio in annuities, the rest of the corpus can be invested aggressively, perhaps even for legacy. Hence, when you buy annuity (at the right age), you don’t necessarily hate your kids.
A few post suggestions (hope you like them)
https://www.personalfinanceplan.in/when-purchase-annuity-plan/
https://www.personalfinanceplan.in/retirement-planning-staggering-annuity-purchases/ (especially this one)
https://www.personalfinanceplan.in/high-retirement-more-income-low-risk/