Many investors purchase pension plans so that they continue to receive monthly income even once their regular salary stops after retirement. Which pension plans do you choose? In this post, let’s look at a popular pension plan from SBI Life, SBI Life Saral Pension Plan.
SBI Life Saral Pension Plan: Important Points
- A Participating, Non-Linked, Traditional Pension Plan (the type of products I don’t like)
- You have an option to add a life insurance rider up to Rs 50 lacs to the plan. If you add this rider, the insurance company will pay you Sum Assured on Death, in addition to other benefits from the policy. I do not see any need for this rider though.
- Reversionary bonuses are guaranteed for the first five years. Not really useful.
You will invest in this SBI pension plan for a few years. Thereafter, you can withdraw some amount as a lump sum and use the remaining to purchase an annuity plan. The annuity plan will provide you a pension for life.
SBI Life Saral Pension Plan: What happens at plan maturity?
At the time of maturity, your invested premiums will grow to:
Sum Assured on Vesting/Maturity + Vested Reversionary Bonuses + Terminal Bonus
Reversionary bonus is announced every year. Once the bonus is declared for your policy, it becomes a guaranteed benefit.
Terminal Bonus is announced every year but is applicable for your policy only in the year of demise or maturity or surrender. Terminal bonus is expressed as a percentage of Vested Bonuses (and not as a percentage of Sum Assured).
At the time of vesting/maturity, you will get these 3 options:
- You can use withdraw up to 1/3rd of the accumulated corpus at lumpsum. Recently, IRDA hiked this cap to 60% of the accumulated corpus. As I understand, this will only apply to new plans/versions filed with such a clause. The remaining amount can be used to purchase an immediate annuity plan. OR
- Use the entire amount to purchase a single premium deferred pension product. The deferred annuity product can be used by those who do not want the annuity income to start right away. OR
- In case the age of the policyholder is less than 55 on the date, you get an option to defer the vesting date up to the age of 70. In a way, you extend the policy maturity/vesting date. You will keep paying premium during the extended term.
Note that IRDA, in Non-linked Life Insurance Regulations, modified some of the rules at the time of vesting recently. Now, up to 60% of the accumulated corpus can be withdrawn lump sum and the remaining amount can be used to purchase an immediate annuity or a deferred annuity plan. I am not sure if these new rules apply to older plans too.
SBI Life Saral Pension Plan: Tax Benefits and Tax Treatment on Maturity
You will get tax benefit up to Rs 1.5 lacs under Section 80CCC for investing in this plan. Do note this tax benefit comes within the overall basket of Rs 1.5 lacs under Section 80C.
At the time of maturity, the amount withdrawn as lumpsum (whether 1/3rd or 60%) is exempt from tax. The remaining amount that goes towards the purchase of an annuity plan is also exempt from tax. However, the annuity income from such a plan is taxed at your marginal tax rate in the year of receipt.
The taxation is adverse if you surrender the plan before completion of the policy term. The entire surrender proceeds are taxable at your marginal rate if you have taken the benefit for investment under Section 80CC. For more on this and detailed understanding of taxation of pension plans from insurance companies, refer to this post.
SBI Life Saral Pension Plan: How will your corpus grow?
Let’s try to estimate this with the help of examples.
A 35-year old man purchases Rs 10 lacs (Sum Assured on vesting) plan. The policy term is 25 years. The premium shall be Rs 33,443 excluding GST. Including GST, the premium shall be Rs 34,948 in the first year and Rs 34,196 in the subsequent years.
Maturity corpus consists of 3 items:
- Sum Assured on vesting
- Vested Reversionary Bonuses
- Terminal Bonus
We know that Sum Assured on Maturity is Rs 10 lacs. For the reversionary bonuses, I look at the bonuses for the past years. The reversionary bonus ranged from 3.0% to 3.25%. Terminal bonus can be unpredictable, but I could see the rate of 15% for the terminal bonus. Do note terminal bonus is expressed as a percentage of vested reversionary bonuses in this plan.
Vested Reversionary Bonuses = 25 years X 10 lacs (Sum Assured) X 3.25% = 8.125 lacs
Terminal Bonus (at 15%) = 15% * 8.125 lacs = 1.22 lacs
Total accumulated corpus at the time of maturity = 10 lacs + 8.125 lacs + 1.22 lacs = Rs 19.34 lacs
That’s a return of 5.80% p.a. on invested premiums. This does not look very attractive. Remember this pension plan is a pure investment product (there is no life insurance component). PPF, a pure investment product, gives you 7.9% p.a.
You can argue that terminal bonus can be higher. Yes, that is possible, but would you want to bet on it?
Point to Note: You can’t withdraw the entire accumulated corpus. At least, some of the amount will go towards the purchase of an annuity plan.
Should you invest in SBI Life Saral Pension Plan?
No. We saw that returns were about 6% p.a. PPF gives a much higher rate of return and is way more flexible. By the way, you can also use PPF as pension tool.
Before you sign up for any pension plan, you must understand that a pension plan has two stages. Accumulation stage (where you keep paying the premium and your corpus grows. It is followed by the distribution phase (lumpsum withdrawal and annuity purchase).
You don’t need a pension plan to accumulate funds for your retirement. You can use any investment product. You can use PPF, EPF, FDs, mutual funds etc. to accumulate corpus. Once you have accumulated the funds, you can use the money whichever way you want. You can even purchase an annuity plan. Additionally, note it is an annuity plan that provides you monthly income.