Chennai:

However, as in the case of the telecom industry, there are no compulsions on the part of life insurers to offer this scheme as an IRDA scheme.

Concerned about the lack of awareness among the public about the growing importance of retirement savings on the one hand, and the lack of suitable and acceptable pension plans in the market on the other, the authority wanted to frame a standard, simple plan with a uniform technical structure to be sold by all life insurance companies.

A committee was set up under the chairmanship of N K Shinkar, consulting actuary, IRDA, with several actuaries as members.

However, what is interesting is the timing of the standard plan announced by IRDA. The government had earlier announced its intention to set up a separate pension regulator. All these years IRDA has been demanding to regulate the pensions sector as and when it is thrown open.

The IRDA pension plan
Any body who is aged between 18 and 60 years has to make regular and periodic payments to a life insurer for an agreed period. Upon attaining the vesting age (the age chosen by the policyholder: between 50 and 70 years) the accumulated sum will be given to the policyholder for buying annuity from any life insurance company to get a steady income during retired life.

According to IRDA, life insurers are free to offer additional features, say life cover to its standard plan for extra charge. The minimum contract term will be five years and the plan allows deferment of vesting age by five years once during the policy period.

According to the IRDA plan the contributions will be structured to provide an accumulated fund for buying an annuity, which is envisaged at a minimum of Rs 6,000 per year (equivalent of Rs 500 per month). This will be reviewed by IRDA regularly to keep it in line with the cost of living index.

Contributions
The minimum annual contribution by the policyholder will be Rs 3,000, payable in one or more instalments. Contributions can be made to the insurance company chosen by the policyholder through select banks. Individual companies may choose to cap the maximum annual contribution.

Until the vesting age, the product is an investment linked one that offers smoothing of investment returns and some guarantees, provided that benefits are taken at the vesting age.

If a policyholder takes the benefits before the vesting age, then the insurance company has the right to base benefits on unsmoothed investment returns in order to protect the interests of other policyholders.

The insurance company will issue an annual statement to the policyholder showing the accumulation to his credit as at the end of the year in the Policyholder Fund. This statement will also show the contributions received and charges debited and income credit during the year.

The committee has recommended that the capital value of the contributions of the policyholder less charges (expense and mortality related), as also declared income additions, to be guaranteed for payment on the chosen vesting age as also on the death of the policyholder.

Agents who canvass this business will be paid a commission of 7.5 per cent on the first year contribution and 2 per cent on subsequent contributions. The plan allows for 2 per cent administrative charges per year (for the first five years of the policy) on the amount lying in the credit of the Policyholder Fund. From the sixth year onwards the charges comes down marginally.

Benefits on vesting age
On attainment of the vesting age the policyholder will have the option of taking as a lump sum, up to 25 per cent of the accumulated amount, to his credit in the Policyholder Fund, subject to the existing tax laws.

Then s/he can draw an income from the accumulated corpus directly at a predetermined rate annually, if he so wishes, and for a predetermined period. With the balance amount, he can take a conventional life annuity.

If the policyholder were to die before the vesting age, the spouse of the policyholder will have the option to take up to 50 per cent of the policy proceeds in a lump sum and have the balance amount converted into a conventional annuity on his/her life, subject to some terms. Other options are also available.

Tax benefits
The tax liability on the benefits payable is the responsibility of the policyholder to settle with income tax authorities. According to the Shinkar committee, IRDA should try to get the plan approved for tax benefits under section 80 (CCC) and section 10 (23)(AAB) of the Income Tax Act.

It has also recommended that the 9-per cent income guarantee subsidy announced for the Varishta Pension Bima Yojana be given to this plan also.

Other recommendations include that IRDA should try to obtain for this plan additional tax concessions such as tax-free pension up to a limit, index linked bonds from the government to enable guaranteed real returns to the policyholders and also a waiver of the policy stamp duty.