Pension ULIPS- Part 1. Review on Choosing a Retirement Savings Plan

Targeting a 25 year old an ad says. “Have a dream retirement .Invest as little as 4000 pm for 30 years in our ULIP scheme and retire with a corpus of 10000000.” Who does not want a dream retirement? But do ULIPS really give such fantastic returns? May be yes .May be no but what is important is to know how much you will be really paying to achieve your financial goal?

Is the company transparent or does it have some hidden charges? Before signing your cheque for the premium amount due diligence is needed to avoid shocks later. Please find some time to read the sales brochure of about at least 15-20 different companies before taking a final decision on your preferred company

Compare the premium allocation charges(PAC), monthly policy administration charges(PAD), Fund management charges(FMC), mortality charges, surrender charges not just for the initial years(3-5) but throughout the term as this will not only give a fair idea of what your total deductions will be but also your service tax(ST) liability as all the mentioned charges are taxable.

(deducted by canceling your allotted units).

Let us take a few examples

(Annual premium=100000, term=20 years, no life cover and ST is 10.3% in all cases)

Example No 1

Charges.Year1.year2.Year3.Year4+

PAC.100%.0.0.0

PAD.0.40.40.40

PAC is 100% in the first year so all your money is deducted towards various expenses. And virtually nothing is invested. Kiss your money goodbye for the first year. So the net investment at the end of each year looks as

.Gross.Net

Year1.100000-100000.0

Year2.100000-480.99520

Year3.100000-480.99520

Year4+.100000-480.99520

Example no 2

Charges.Year1.Year2.Year3.Year4+

PAC.25%.10%.5%.2%

PAD.60.60.60.60

The net investment at the end of each year looks as

Year.Gross.Netamt

Year1.100000-25720.74280

Year2.100000-10720.89280

Year3.100000-5720.94280

Year4+.100000-2720.97280

Example No 3

Charges.Year1.Year2.Year3.Year4

PAC.20%.20%.0.0

PAD.40.40.40.40

• Rs 40 pm or 0.3% of annual premium whichever is greater

The net investment at the end of each year looks as

Year.Grossamt.Netamt

Year1.100000-23600.76400

Year2.100000-23600.76400

Year3.100000-3600.96400

Year4.100000-3600.96400

Example no 4

Charges.Year1.Year2.Year3.Year4+

PAC.0.0.0.0

PAD .1.5%.1.5%.1.25%*.Rs 900 pa@

• 
  
  
  • as a percent of annual premium deducted monthly
  
  
  

@- increasing by 5% annually

In this case PAC is zero! Isn’t that great?

The answer is No . Why so?

Look at the PAD.It is reflected as percent of annual premium for the first 3 years

So 1.5% pm means 18% p.a!

So the net investment at the end of each year looks as follows

Year.Grossamt.Netamt

Year1.100000-18000.82000

Year2.100000-18000.82000

Year3.100000-15000.85000

Year4.100000-900.99100

Year5.100000-945.99055 and so on

Continued in part 2