For a long time, taxable annuities were the bugbear of pension products, making them less attractive to individual customers.
Not for long though. The changes proposed in the Direct Tax Code (DTC) may herald tax-efficient annuities and help the pension market to take off. Such annuities make for a reliable retirement planning instrument indeed.
The DTC, which is yet to be implemented, has a provision for making the annuity part of the pension product tax-free. “The pension market has gone through various phases of reformation. The new guidelines will definitely favour the pension policy-holders. The DTC can play a vital role in making pension a viable option for the customers,” says Suresh Agarwal, executive vice president and head- distribution, individual business and strategic initiatives, Kotak Life Insurance.
Pension products under the insurance umbrella have two phases. One is the accumulation phase and the other, the annuity phase wherein the policy-holder gets a specified amount as pension from the accumulated fund.
Life insurers are, however, sceptical about the revival of pension markets. As per the data released by the Life Insurance Council, the total business premium collected by the life insurers had declined by 21% year-on-year to Rs49,046 crore from Rs62,362 crore.
The fall in new business premiums can be attributed to low sales in unit-linked plans (Ulips), particularly the negligible sales in pension products.
Before September 2010, the individual pensions segment contributed around 32% to the premium collections of the life insurers.
The average in 2011 has fallen drastically to 1.2% from an average of 26% last year.
Total number of policies sold in the pension segment has also come down to 0.06 million from 3.35 million.
Taking stock of the grave situation, the Insurance Regulatory and Development Authority (IRDA) had rolled out a set of guidelines on pensions last month. It says that insurers should specify the assured benefits, applicable in case of death or vesting or surrender, upfront.
“We welcome it, and feel that companies need to widen their product offerings. There is a need to offer non-guaranteed pension products to investors who have larger risk appetite,” says SB Mathur, secretary-general, Life Insurance Council.
The new IRDA guidelines scrapped out an assured 4.5% guarantee, thus enabling the insurers to keep a guarantee which can be more than zero.
Not everyone is happy about the changes. “The provision of annuity distribution even in case of surrender is not a good deal for insurers, particularly where it was applicable only in case of maturity,” says GN Agarwal, chief actuary, Future General Life Insurance.
The new guidelines make it mandatory to take the annuity from the same insurer where the person accumulated the fund.
Hence the industry is keen on offering new products that will comply with the regulations.
Experts feel that there may be some genuine growth expected in the pension market in the coming year.
“We can expect a gradual growth in the pension market as insurers are in the process of reading through the guidelines. Later, they will go forward to file the products,” says Suresh Agarwal of Kotak Life Insurance.
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