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Unit linked pension plans- All you need to know

Unit linked pension plans- All you need to know

Unit linked insurance plans became a rage among investors when they were launched. With various investor-friendly changes in the plan, ULIPs are now more in demand. Such is the popularity of ULIPs that even pension plans are offered in the unit linked version. However, many of you are unaware of the various aspects of unit linked pension plans. So, here is everything you need to know about such plans so that you can buy one for your retirement funding –

What are unit linked pension plans?

Unit linked plans are insurance plans which are developed along the lines of mutual funds. The premium collected under unit linked plans is pooled together and is then invested in different stocks and shares of the capital market. Investors can, thus, earn market-linked returns along with enjoying insurance cover and other flexible benefits. Unit linked pension plans create a corpus which is specifically designed to fund your retirement. The fund created under unit linked pension plans is used to pay annuities which create a regular source of income post retirement.

How do the plans work?

Here is how unit linked pension plans work –

  • You pay the premium you want to invest, choose the sum assured and the policy term
  • Relevant charges are deducted from the premium
  • The allocated premium paid is invested in a fund which is chosen by you
  • The fund value increases or decreases according to the market performance and the premiums paid

The benefits payable

The benefits under a unit linked pension plan are as follows –

  • If the insured dies during the policy term the death benefit is paid which is higher of the fund value or the sum assured. The nominee can choose to take the death benefit in lump sum or in annuity pay-outs.
  • When the plan matures you get various options. You get an option of receiving 1/3rd of the fund value in cash. This benefit is called commutation of pension and is tax-free. Thereafter, the remaining value is to be taken in annuity instalments. You can defer the annuity date or buy a single premium deferred annuity plan with the remaining fund value.

Charges involved

Unit linked plans have various charges which are deducted from the fund value. These charges are as follows –

  • Premium allocation charge – this is the first charge which is deducted from the premium amount before the premium is invested in the chosen fund
  • Fund management charge – this charge is deducted monthly for managing the portfolio of the fund
  • Policy administration charges – administration charges are incurred in servicing the policy. These charges are also deducted monthly
  • Mortality charge – this charge is deducted for the insurance cover provided with the plan.
  • Discontinuance charge – there is a lock-in period of 5 years before which the plan cannot be surrendered. If you surrender the plan during the lock-in period, discontinuation charge is levied.
  • Other charges – the plan might charge you for any changes in the policy. Moreover, there might be a charge for switching, premium redirection or partial withdrawals if they are not free.

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Flexible features of the plan

Unit linked plans offer various flexible features which are unique to them. Unit linked pension plans are no different. Here are some of the flexible features you can find –

  • Switching – switching lets you change between the available funds if your investment strategy changes. Specified number of switches in a policy year is free under most plans exceeding which there might be a charge
  • Partial withdrawals – after the first five policy years you can withdraw a portion of your fund value. This is called partial withdrawal. Every plan has a limit on the minimum and maximum partial withdrawal
  • Top-up – investing an additional premium under the plan can be done through top-ups. Top-ups are allowed under some unit linked pension plans which also increase the sum assured.
  • Premium redirection – under this feature you can redirect subsequent premiums to be invested in another fund.

Unit linked pension plans, therefore, not only ensure a retirement income, they also grow with the economy. Moreover, the death benefit or the commuted benefit is tax-free. (Know more about the tax benefits of life insurance here). Thus, if you want to create a substantial corpus for your retirement, unit linked pension plans should be your ideal choice.

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