Annuity Payment options against Pension Policy

Please guide me as to how to decide about selection of proper option from the following options offered by Pension Plan :

1. annuity as long as one annuitant lives

2. annuity guaranteed for 5, 10, 15 or 20 years and life thereafter

3. annuity with return of purchase price to nominee

4. annuity payable for life increasing at a simple rate of x%

 - Vinayak Bapat

Dear Vinayak, each of the option listed by you has it's own pros & cons.

1. Annuity for life - In this case the annuity amount is highest but the annuity stops the moment, annuitant dies. In this option, If there is a surviving spouse, S/he 'll not get any more annuity from the annuity provider. This Option is beneficial to the persons, where no spouse is there to survive or extra provisions are already there for spouse.

2. Annuity Gtd. for a certain period - In this option, the Annuity is provided for a certain period no matter, annuitant is alive or not during the full period. In case of premature death of annuitant, this option 'll provide annuity till the gtd. period is over. If the annuitant survives the gtd. period, the annuity 'll continue till the death of annuitant & 'll stop after her/his demise. This option is beneficial again for persons, where there is a surviving spouse & there is a history of early death in the family.

3. Annuity increasing with a simple rate of 3% - This type of annuity 'll provide a small cushion towards inflation in the later part of life. The amount of annuity is lower here than the prev. 2 discussed. Here again the annuity stops after the death of primary annuitant.

4. Annuity with return of purchase price - Under this type, annuity is paid first to annuitant till life than to spouse till life & after that the purchase price is returned to the nominees of the annuitant. The payment in this type of annuity is lowest. This is suitable to the persons who wants to leave a fortune for their heirs after their demise.

Thanks

Ashal

Revised ZProposals of Direct Tax code

Dear Friends, here is a quick view of the new proposals of Direct Tax code.

1. PF, PPF, GPF, EPF, NPS & Annuity Plans as well as proceeds from Term plans (Pure Life insurance) 'll be Tax free as per E - E - E. So no Tax at withdraw from these instruments.

2. Home loan Interest benefit on 1.5L Rs. for self occupied property, is retained.

3. The list of permitted savings intermediaries now includes most of the current saving instruments lile - apart from the instruments listed in point 1 above, NSC, ULIPs & Traditional Plans,  ELSS, Bnak Tax saver FDs, Bonds (Possibly Infrastruture bonds)  etc.

4. Long Term capital Gains from shares & Eq. MFs 'll become taxable.

5. No clarity as of now for the earlier proposed Tax slab rates.

This Revised Discussion Paper is available on the following websites:
finmin.nic.in and incometaxindia.gov.in
Responses to the Revised Discussion Paper should be sent online through the link provided at these websites or at the following e-mail address: directtaxescode-rev@nic.in. Responses are solicited upto 30th June, 2010.

Thanks

Ashal

My recent posts on Outlook Money Facebook boards

Dear Friends, here r some of my recent posts on OLM FB Board.

http://www.facebook.com/group.php?gid=107180401906&v=app_2373072738

Thanks

Ashal

Guaranteed income for a lady with zero risk tolerance

Q. - My friend`s sister is getting married at the age 43. After having worked in many companies she was able to save an amount of Rs. 69 lakhs. All this amount is parked in FDs in a few banks. After marriage she does not plan to go to work, but is insistant that financialy she wants to be independent and wants to receive fixed income from the proceeds of the 69 L throughout her life. She says she cant take any risk with her saved funds. Can she approach an insurance company, say LIC or HDFC Standard Life and buy annuity for a term of 30 years ? If yes, what could be the monthly amount ? She is very clear she does not want to invest in shares or life insurance, as the husband will, through his income will cover for insurance etc. Please help. Thanks, Y Pal.

Ans. Dear Y pal, Here is the path.

1. Invest 4.5L Rs. in POMIS to earn 3K Rs. mly.
2.
(a) Invest around 10L Rs. in LIC`s Jeevan Akshay VI plan Option (i). It`s an immediate annuity plan. the mly. earning `ll be around 6800 Rs.
(b) Invest around 10L Rs. in LIC`s Jeevan Akshay VI plan Option (ii). the mly. earning `ll be around 6400 Rs.
(c) Invest around 10L Rs. in LIC`s Jeevan Akshay IV plan Option (iii). the mly. earning `ll be around 6000 Rs.

Till now around 35L Rs. r invested & she is able to earn a gtd. income of appx. 22K Rs.

For remaining 34L Rs. invest 20L Rs. in Bank FDs of various term say 1,2,3Y for her emergency & liquidity needs.

For Last 14L Rs. invest the same in Birla MIP II savings 5 Plan (growth option) to give a kick in return for her future life against impact of inflation.

As u said she is risk averse on her capital, I have not advised any higher Eq.% related instruments. In case of Birla MIP, the max. Eq. component is limited to just 5%.

Thanks

Ashal

Q. - Superb ashalanshu ! I will convey your suggestions verbatim to her. Thanks a lot. Regards, Y Pal.

Ans. - Dear Y Pal, thanks for ur regard & joy. Now onwards the most important work starts. Knowing the kind of money the lady in question has, the agents of LIC as well as other Ins. cos. executives of Banks etc. all `ll try their level best to sell some thing which is not meant for her. So she should remain straight in her demands of products.

There is one important thing - from the gtd. mly income of around 22K Rs. her annual gtd. income `ll be around 2.65L Rs. Now add the Bank FD interest to it (from Bank FDs of 20L Rs.) her total income in all probability `ll be around 4L to 4.25L Rs. I assume she may earn around 1.25L to 1.75L Rs. interest on these bank FDs (interest rates r going up). It means she w`d have to pay income tax. But as per the proposed budget for FY 2010-2011, she may invest a max. of 1.2L Rs. in section 80C instruments & another 15K Rs. in mediclaim policies under section 80D. thus total investment in Tax saving instruments `ll be around 1.35L Rs. & her net income (post Tax saving investment) `ll be 2.65L to 3L Rs. As her age is only 43Y, her zero tax limit is 1.9L Rs. Above this she w`d have to pay Income Tax @ 10.3% rate = 8 to 11K Rs. as Tax. appx.

Post Tax her net income for consumption `ll be around 2.55L to 2.9L Rs.

Now comes the last question, where to invest for 1L rs. of 80C Tax saving?

Ask her to open a PPF acct. if not opened already & to deposit the max. possible 70K Rs. from 1st to 5th april @ the start of every FY. For remaining 30K she may invest in ELSS (Tax saver MFs) if she is ready to take this small amount of money on risk otherwise the Tax saver bank FDs r the final way.

thanks

ashal

Q. - Thanks ashalanshu once again. So kind of you. I dont think she has done so much forward planning which is to invest the returns from investments into tax saving 80C. Even I did not think from the tax saving angle. Thanks for your kind help. Regards....Y Pal

NPS - Not Cheap

NPS is not that much cheap as it's look in first glance. For investors of higher amounts indeed it's providing the benefit of size but for small investors it's not cheap at all. For a small investors investing just 6K Rs. the minimum yly. subscription, sample this.

Fund management charges are low enough, but the fixed charges are high. In a bad year, when you barely manage to invest 6000 in the requisite 4 yearly installments, you incur the following charges:
A. Account opening charge of Rs. 50 (only required for the first year)
B. Annual maintenance charge of Rs. 350
C. 4 transactions, Rs. 10 fees to CRA for each. Total Rs. 40.
D. Registration with PoP (Point of Presence, kind of the investor’s broker): Rs. 40. This will be required not just the first time, but everytime the PoP is changed for some reason (e.g. migration from one location to another)
D. 4 transactions, Rs. 20 fees to PoP for each. Total Rs. 80.
Other charges are negligible; but these charges total to Rs. 560. This is 9.33 percentage of the investment for the year (Rs. 6000). Consider it kind of an entry load for NPS.

In the light of the above facts, NPS is useful for investors who r going to commit higher amounts, as barring Fund management charge, all other charges r not linked to the investment or fund, instead they r fixed in nature & may prove counter productive for lower investment amounts.

Thanks

Ashal

JEEVAN TARANG AS AN ANNUITY OPTION

Q. - Is it better to go for an annuity like Jeevan Tarang of LIC or an MF with term insurance.Annuity offers returns for lifetime whereas MF does not.Also please tell me which is the best annuity available.My age is 39 and i am due to retire on age 58? - Vinod Pulari

ANS. - Dear Vinod Pulari, Plz. don't opt Jeevan Tarang, for ur age the return from this policy r very poor. Sample this -
For a 5L cover, for ur age, the prem. for 20Y policy = 24610 Rs.

Hence total prem. paid over 20 years = 492200 Rs.
For past 4 years the LIC have announced 48 Rs. bonus per annum per 000 sum assured, so we can take this as benchmark for our calculation.
At the end of 20 year, u 'll get amount = 20*48*500 = 480000 Rs. or appx. ur prem. back.
From 21st year u 'll get 25000 Rs. (5% of 5L Rs.) as survival benefit every year tax free till u r alive.
After ur death, ur nominee 'll get the basic sum assured of 5L Rs. back as maturity benefit.
Now compare this with the combo of PPF+Term Plan (Anmol Jeevan from LIC).
Plz. note cheaper term insurance plans r available in market but i'm limiting it to LIC's Anmol Jeevan for comparing of product within same Ins. co. The annual prem. for 5L cover for 20 Year plan = 3193 Rs.
difference in the prem. = 24610-3193 = 21417 Rs.
Invest this amt. every year in PPF, at the end of 20 year, the amt. in PPF = 10.58L
Withdraw from PPF amt. equal to bonus declared by LIC = 10.58L - 4.8L = 5.78L Rs.
This 5.78L Rs. 'll remain in PPF 'll earn interest for next year. After 1 year the interest on 5.78L Rs. = 46240 out of which u may withdraw 25K Rs. as tax free.
Balance amt. 'll remain with PPF & like vise every year, u 'll withdraw only 25K & the PPF amt. 'll keep on increasing.
Plz. note in this case even after 25 years or 30 years from now onwards or for ur age of 65-70, at ur death, ur nominee 'll receive more than what they 'll get in Jeevan Tarang (the basic sum assured of 5L Rs. only).
Now do tell me, what r u going to opt?
Plz. note here i have not advised to invest in any Eq. MFs for betterment of return. U r already aware that PPF is one of the safest scheme.


Thanks

Ashal

NEW PENSION SYSTEM - NPS

Dear friends, a lot of u were demanding details on the NPS, so for  benefit of all of you. Here i'm giving some details of this.

WHO CAN INVEST?
Scheme is open to all Indian citizens aged between 18 years and 55 years.

WHERE TO INVEST??
You can invest from any of the 285 Point of Service across India, run by 22 Point of Presence Providers(POP) including SBI, its 7 Associate Banks, ICICI Bank, LIC, Reliance Capital, etc. Once registered, the Central Recordkeeping Agency (CRA) will give you a Permanent Retirement Account Number (PRAN) along with Telephone and Internet Passwords.

HOW DOES THE NPS WORK??
Just like a Depository maintains Demat Accounts, likewise your Records are maintained by the Depositories.
Six Different Pension Fund Managers would invest the Amount Invested by the Commonn People into Different Asset Classes classifed as
Equity (E)
Government Securities (G)
Debt Instruments (C)

The Six Fund Managers are
ICICI Prudential pension Management\
IDFC Pension Fund Management
Kotak Mahindra Pension Fund
Reliance Capital Pension Fund,
SBI Pension Fund
UTI Retirement solutions

Depending on the efficiency of the Fund Manager, these Contributions would Grow and accumulate over the years.
You do need to mention the Fund Manager of your Choice, without this, your Application is liable to be rejected.
The Default Investment is called the Auto Choice Lifestyle Fund.
For a investor below 35 years of age, 50% of investment amount will go into E(Equity), one-fifth into asset class G(Govt Securities), and the rest into asset class C(Debt Instruments). From the age of 36, the default proportion going to equities decrease annually and investment percentage in government securities will increase such that by the age of 60, these investments will gradually be adjusted so that only 10% remains in equities, another 10% in corporate bonds and 80% in government bonds.

MINIMUM CONTRIBUTION :
Minimum Contribution per annum is 6000 and you can contribute even as low as 500, at least 4 times a year. You can invest through Cash, Cheque or DD at the POP.
There is no upper ceiling for your annual contribution but Tax Benefits is capped at 1 lakh under Sec80C. The Investor HAS to invest at least once every quarter. In case of default, you will have to pay Rs.100per annum and also need to pay the required minimum amount to reactivate your Account.
Also during this period of your non-payment, your Corpus will keep getting reduced because the NPS will keep charging its Expenses against your Units. The Account will be closed as and when the Value of your Account falls to Zero.


WHERE IS MY MONEY INVESTED???
You have got the Right to decide where your money is invested. Please note, that you cannot invest more than 50% in Equity and Fund Managers cannot in invidual stocks but only in Index Funds.



RETURNS :
On Completion of 60 years, the investor`s accumulated amount gets transformed into a lumpsum towards buying Annuity for a steady stream of payments for the rest of the Investor`s life. The Insurance Companies, who come into the picture now, with their expertise will compute as to how long the investor could survive and offer flexible investment and payment options on annuities.
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies.
A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.

LAST YEAR THE NPS GAVE A RETURN OF 14.82% WHILE HANDLING THE CORPUS OF CIVIL SERVICE PENSIONS.


TAX ANGLE :
At present, the NPS is to be Taxed at the time of Withdrawal. The Pension Fund Regulator has taken up the issue with the Finance Ministry to address the anamoly and the decision is expected within next year or so.


NEGATIVES :
1) Though the Fund Management is ridiculously low at a miniscule 0.0009% per annum, the Cost of Opening an Account(Rs.50), Annual Maintenance Charge(Rs.350) and a Per Transaction Charge of Rs.10 actually makes the NPS COSTLIER than a Regular Mutual Fund with a 500 monthly sip. The cost works out to around Rs.350 as fixed cost on every Rs.2000 he contributes. Unless the Govt steps in to correct this, NPS would be a failure with the small savers.
2) No Tax Concession on Withdrawals.
3) No premature Withdrawals allowed expect for Critical Illness, building/buying a house; Even at sixty, you can only withdraw as cash 60 per cent of the corpus, the rest must be used to buy an annuity.
4) You need to compulsorily buy Immediate Annuity with 80% of the Money accumulated, if you want to Withdraw before you are 60.

POSITIVES :
1) The Investor has the option of shifting from One fund Manager to another by instructing his POP to do so. This facility is available between May 1 and May 15 every year.

2) Even relocating to another city will not affect your investment as the PRAN remains the same.
3) The Monthly/Quarterly Contribution towards the NPS will be partly routed towards Equity which will automatically ensure Rupee cost Averaging and ensure High Returns and thus ensure 'higher than inflation' returns.
4) Investment upto Rs.1 lakh is Tax Deductible under Sec80c.
5) For Investors with slightly larger amounts and investing 4 times a year, the charges are attractively low. The NPS wins hands down on this matter.

CONCLUSION :
This is the Best thing to have happened to the Indian Investors who have not had much of a choice regarding Pension earlier. The benefits of Compounded Returns that the NPS offers will be immense. If the NPS is promoted in the right way, it will be no less than a Revolution.
The Tax on Withdrawal, for me, is a blunder and will be rectified by the Govt sooner rather than later.
The Interim Withdrawal too may be allowed in future, which will make this product that much more attractive.
The best option as of now i think is to remain invested in max. Eq. for person below age 50 & above that should go for the LifeCycle Fund.
The Low Charges and Automatic Rupee Cost Averaging makes NPS a Better Option than the Pension Plans offered by Insurance Companies.

But still some loose ends are there so as of now enter in NPS with minimum annual commitement of 6K Rs. & wait for the dust to settle & the clarity on taxation matters & then bump up ur investment in NPS.

Thanks

Ashal

How to go for Pension Plans or retirement Planning

How to plan for retirement. I am investing in PPF regularly but very actively looking for retirement from ICICI, HDFC or Metlife. Still not clear on what`s best, looking at following parameters to start with:
a. Minimal Premium Accumulation Charge ( Even if it`s there, then only for regular premium for first few years ).
b. No or very little premium on Top-ups
c. Clear guidelines on Annuity plan ( ICICI explains most clearly but doesn`t give all answers ).
d. Death Benefits ( I don`t want life insurance cover )
e. Any other charges if any should be clearly started in terms on figures on monthly/annual basis, also whether expenses are on NAV or premium paid.

Answer - Dear Friend, Plz. do a simple exercise. Call at least 5-6 Ins. agents from different Ins. cos. & give following details to agents. 

1. Age of Person, 60 years (the age u `ll start receiving ur pension)
2. Amount to be invested 1Crore
3. Plan selected - Immediate Annuity Plan.
4. Ask to give benefit Illustration of mly. pension till life of policy holder after that same pension to spouse till life & after that return of purchase price to the legal heirs of policy holder.

Plz. do this exercise with at least 5-6 Ins. cos. inform me for ur findings after completing ur exercise.

Why I`m asking to do so, bcoz when u `ll go thru this exercise, u `ll come to know what the meaning of large corpus creation is? Plz. do note as per my prev. reply of retirement corpus, calculate ur own requirement as per inflation no.

Thanks

Ashal ...

How to get a TAX FREE Pension

Now a days a lot of young males & females are investing in Pension Plans offerd by almost all Insurance Cos. in India with a target to save enough for their sunset years. Once they are retired from their jobs, the accumulated corpus 'll provide the handsome pension, as the TV commercials of these Insurance cos. showcase.

If life is so simple, then there should not be any problem on earth. The basic problem with all such pension plans & investors who are investing in these plans, neither the plan providers (read Ins. cos.) are giving full details nor the customers (investors) are aware regarding their future - 1. What 'll be the accumulated corpus?

2. what 'll be the appx. returns (read pension)?

3. What is tax treatment of pension?

4. till how much time, the pension 'll be given?.........

Not many people give serious thought on these aspects. The most cruicial part of retirement planning thru these pension plans is - people are not aware, How the income tax liability/applicability 'll impact their over all pension.

1. Premature Withdraw - If due to any reason, the person, wants to premature withdraw of this pension plan, the surrender amount 'll be added to the taxable income from all other sources in the Financial Year of Receipt of such surrender value.

2. Start of Pension - At the time of start of pension (also known as vesting age in Insurance Cos.), The investor may withdraw a max. 1/3rd amount of her/his accumulated corpus till date as Tax free Cash commutation. Balance 'll be used for pension generation. As per IRDA guidelines, the investor has option to put remaining amount with any Ins. co. which is offering max. pension on this corpus.

Normally people prefer to start pension @ age of 60 years. Now comes the most interesting part of taxation on pension plans. Whatever amount received as pension 'll be added to the income from all other sources in the relevent financial year & taxed accordingly. At the same time, the cash commuted part (if opted for) 'll also be invested in safe avenues like SCSS, Bank FDs, PO schemes, Etc. The interest earned from such investment as already taxable. Hence the total pension generated from accumulated corpus as well as interest income from CASH COMMUTED part is taxable.

Now comes the question - How we can manage to avoid such income tax on our pension?

If an Investor, wants to invest in UNIT Linked Pension Plans (ULPP) to receive pension, it is better to invest in whole life ULIP or at least age 75 ULIPs. The investor should note here that money received from Life Insurance policies are tax free under section 10 (10) (D) as per current indian tax law. So once the investor reaches the age of 60 (the noraml retirement age) s/he may start withdrwaing tax free pension from ULIP in the form of partial withdraw.

As already mentioned these withdrawls 'll be tax free. the added advantage in case of ULIPs as replacement of ULPP is, one can plan her/his withdraw according to need whereas in case of ULPP, a fixed sum 'll be given no matter, ur actual requirement is less or more than it.

While selecting ULIP as pension plan, always try to invest in the ULIPs which offers lowest cover multiple say 5X or 10X of ur annual prem. & the same time plz. don't overlook the other aspects of ULIPs. Fund management charges, policy admin charges, Prem. allocation charges etc.
Hence make a wise call & if u r really interested to invest for ur pension, invest in a whole life or age 75 ULIP to get a "TAX FREE PENSION."