LIC currently has a ‘Jeevan Akshay’ pension plan which its brokers are really pushing hard. The mainstay of the sales pitch seems to be guaranteed 8.9% interest on your money for life. They further go on to say that in these times of low interest rates, a guaranteed high interest rate seems to be a good enough reason to invest in this plan.
Here are my two bits:
Let me start by saying that in my opinion, Pension Plans are the worst investments. For any figures below, I’m using the LIC table for Jeevan Akshay. Click this link to see this table:
I am taking the first option available for a 60 year old person. If one invests Rs.1 lac, then the annual income from the pension plan will be Rs.8930.
- One has to bear in mind that Pension Plans are for the long term. Say, one buys the plan at 60 years, one expects payments to continue for the next 20 – 30 years at least. Considering this factor, this, 20 years back, did anyone know what the interest rates would be today? So, guaranteed interest may not be a good thing at all. Maybe 10 years into the future, the bank interest rate could be 12%, whereas your ‘guaranteed’ rate is only 8.9%!
- Any pension received is taxable.
- One of the main problems with such pension plans is that in addition to an interest rate guarantee, there is another guarantee which is not very much advertised – that one does not get back the invested amount! That is one thing that I could never understand. Say one takes a policy for Rs. 5 lacs. Something happens and one dies within a month. The money given to the company is gone! One cannot get it back.
- If say, one buys a Pension Plan and unfortunately, falls seriously sick, say, gets a deadly disease like cancer. Then decides that screw the pension, I need the money to stay alive. Forget it! You cannot get the money back.
- In the Jeevan Akshay scheme, LIC has given an option of getting the money back in case of illness or payable to the nominee. It is the option no.3. But then the pension drops from 8930 to 6600 – a drop of 26%. That means you take a hit of 26% just for an option to get your own money back!
If you have already invested in this plan, there is a 15 day ‘freelook’ period during which LIC has to return your money if you don’t want the policy. I suggest you do it.
The best Pension Plan, according to me, is a SIP of a good Mutual Fund. There are a number of funds which have given returns of 15 – 19% annualised and compounded over a period of 15 – 20 years. There is no reason to expect them to give less than a long term average 12% compounded annually in the future. If you are say, 40 years old, start a SIP of Rs.10,000 now. Say, you decide to retire at 60, in 20 years. At a return of 12%, each of those SIP amounts would be approx Rs.90,000! Taxfree! Wait, the best part is still to come – whenever you kick the bucket, the remainder of the money goes to your nominee!!
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