The probability -- as in the Theory of Probability -- that an employed individual selected at random has some sort of old-age income security (read pension) is 0.11, suggests the latest census report.
From the insurer's point of view, it means potentially a fantastically huge market. But from the national point of view, it's high time to go for pension products.
So, how should one choose a good option?
Under any pension plan, a policyholder has to make regular payments to a life insurance company for an agreed period of time.
The policyholder will get at the vesting age (the policyholder's chosen retirement age), an accumulated amount which can be used to purchase retirement benefits (an annuity) for providing a steady income during retired life.
Annuities provide guaranteed income on a regular basis (every month) for the rest of the life after retirement -- irrespective of the number of years one lives. Sounds perfect. But remember, there are subtle differences in policies sold by different insurers.
These can make a large difference when annuity payments start coming in. For example, many insurance companies do not guarantee accumulation of the total periodic payments (capital) that a policyholder makes.
Instead, they say that the sum would be invested in various instruments 'that are safe' and 'would earn high returns'. Meaning, there is a risk to it too -- a decline in the financial markets could lead to erosion of capital.
In other words, lesser pension. Most of these companies also do not guarantee any minimum return on the investment that one makes. So you have no way of assessing if you could have earned more if had you invested the money in a public sector bank deposit for the same number of years.
So, a pension product that provides at least a capital guarantee and a minimum return on investment is a much better option.
This, however, does not come for free, and a number of these companies charge an amount -- which is deducted from the premium -- as the cost of guarantee. So, in essence, one ends up paying money for the capital guarantee.
Also, not all of what one invests in the form of premium actually finds its way into financial instruments. Some companies deduct an amount for managing your fund. They call it the fund manager's cost.
So look for a plan that charges the least in the form of administrative cost. It could ensure that at least a major portion of the premium is actually invested for returns.
With respect to annuities, most of these companies say the best annuity product available in the market at vesting age (for example 15 years form now) would be purchased by the company for the policyholder that would provide for his monthly income.
"This raises a very important question. How would one be able to judge the rate of interest that would prevail in the market then, say 15 years from now?" asks a financial analyst.
"The possible monthly returns that are being calculated on the basis of the prevailing rate of interest may not hold true. A decline in the rate of interest will result in less than anticipated or insufficient income per month," he says.
"The indicative returns are also being calculated on the basis of the present rate of inflation. With the economy growing fast, chances are that inflation could rise and would reduce the purchasing power of money years down the road," the analyst says.
Also, remember, annuities being sold by most insurance companies are deferred annuity -- meaning that ones pays now for the next X number of years after which the company will provide the annuity.
Aside from the Life Insurance Corporation, only a couple of private players offer immediate annuity. Under this, the prospective buyer of the annuity pays a lump sum premium, which is known as the purchase price of the annuity. And the corresponding payments start immediately.
"Although a return would be guaranteed for deferred annuity, the quantum of income per month cannot be judged fifteen years beforehand. This in an era when no one can judge what the financial markets would be six months from now," the analyst said.
