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Pension plans can vary greatly in terms of their structure and the benefits they provide. The two most
common types of pension plans are the defined benefit plan and the defined contribution (or money
purchase) plan. Some employers offer a combination of the two types of plans - known as "hybrid" or
"combination" plans.
Defined benefit plans are designed to provide you with a specified amount of pension benefit when you
retire based on a formula. Generally, this formula depends on factors like years of service and earnings
and is described in the pension plan documents provided to members. Members of this type of plan are
advised annually of the amount of pension benefit they have earned or "accrued" up to that point.
There are three types of benefit formulae commonly used to determine a member's pension:
For each year of service, the formula provides a fixed percentage of your final earnings from employment
or of an average of your earnings over a fixed period of time. In other words your pension adjusts in step
with your wages. For example:
1.6% of your average earnings over the best 5 years of earnings x your total years of service
Your annual pension benefit is a fixed percentage of your annual earnings while a member of the plan.
For example:
Your annual pension benefit is a fixed dollar amount per year of service. For example:
In a defined contribution or money purchase pension plan, a specified amount of money is contributed
regularly for you. This money is placed in an investment account in your name. At retirement, these
contributions - plus interest - are used to purchase a pension. You will not know the amount of pension
you will receive until you retire.
Some defined contribution plans permit employees to make their own investment choices, while others
provide that the employer or a board of trustees is responsible for all investment decisions.
Ultimately, the size of your pension depends on the amount of the contributions made by, or on behalf of
you. It will also vary due to the return on the investment of those contributions. Annuity rates (i.e., long-
term interest rates) at the time of retirement also may be a factor.
The traditional form of pension is the life annuity. Typically with a life annuity, your locked-in pension
money is paid to a life insurance company that guarantees the payment of a fixed amount for your
lifetime. Pension legislation has introduced the following alternatives to the life annuity:
• A Registered Retirement Income Fund (RRIF) will allow you to determine your level of income, as
well as manage your pension capital to take advantage of continued capital growth from
investment earnings, and to have more flexibility for tax and income planning purposes.
• A Variable Benefit, which is similar in nature to the above RRIF may be offered by a defined
contribution plan. Check with the administrator of your plan to see if this is a retirement option
under your plan.
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Pension plans vary greatly in terms of the benefits that they provide and their structure. The two
most common types of pension plans are the defined contribution or the money purchase plan
and the defined benefit plan. Sometimes these two plans are combined and the combination is
thus known as hybrid plans or combination plans.
The company mainly uses three types of formulae to determine the pension benefits of the
member.
Flat benefit formulae- The annual pension benefits that you will get will be a fixed amount per
year of your service. For example 50$ per month per year of service.
Final or best average earning formula- In this formula, the pension will adjust as per your wages.
For each year of your service, this formula provides a specified percentage of your final earnings
or average of your earnings over a specified period. For example, 2% of your average earnings
over the best 6 years of earnings X year of service.
Career average-earning formula- In this, the annual pension benefit, which you will receive, is a
fixed percentage of your annual earnings. For example-1.5% of your annual earnings.
Ultimately, the pension benefit that you are going to receive after your retirement will depend
upon the contributions made on your behalf or by you. It will also depend upon the return on the
investments on the contributions made by you and the annuity factor.
Both defined contribution and the defined benefit plan are registered pension plans, but apart
from them there are few pension plans that are not registered, these are Deferred profit sharing
plan (DPSP), Employee stock purchase plan (ESPP), Individual pension plan (IPP). These do not
generally follow the same rule that registered pension plans follows. These plans heavily depend
upon the performance of the company in which you are working. Thus, it will be difficult for you
to estimate the amount that you are going to receive post retirement.
Individual pension plan is mainly designed for people with higher incomes. This plan allows
bigger tax-deductible contributions. Employee stock purchase plan allows an employee to buy
the shares of the company at a lower price, less than what you pay at the stock market. Deferred
profit sharing plan is a plan that the employers use to build retirement fund for its employees.
The company also contributes a portion of its profits to these funds. However, an employee
cannot put his own money in a DPSP.
Anzer
Product highlights
• A ULIP with a term ranging from 5 to 25 years for an individual between 18 to
60 years of age at entry; the maximum age at maturity is 75 years.
• Option to choose Guaranteed Maturity Benefit (GMB) with an upside potential
based on the performance of funds chosen. This assures that you will receive
no less than the GMB when the plan matures.
Highlights
The premium (minus charges) can be invested in any of the fund options or a combination of all
three. The three funds follow a balanced approach to investment, and hence can be an ideal
choice for investors with low to medium risk appetite.
No premium allocation charge is deducted from your premium, except for the 2 per cent charge
that is levied on the top-up premium.
FMC varies from 1 per cent to 1.25 per cent per year with a maximum cap of 1.5 per cent (Table
1).
Policy administration charges are on the higher side. For example, in case of a 20-year policy
with a basic sum assured of Rs. 590, the charges will be Rs. 12.91 for the first three years and
Rs. 13.23 for the remaining years, compared to the normal charge of Rs. 2 to Rs. 3. Mortality
charge is also high as compared to other ULIP plans.
Policy revival charge is Rs. 100, which can go up to Rs. 1,000 at the company’s discretion. A
surrender charge will be applicable if the policy is returned in the first 3 policy years.
Two fund switches, two partial withdrawals and two premium redirections are allowed free per
year at an additional cost of Rs. 100, with a maximum cap of Rs. 500 per additional request.
Incentives
1. Maturity benefit
• Guaranteed maturity amount depending upon GMO along with the fund value is paid at the
time of maturity.
2. Death benefit
The nominee will receive basic sum assured, enhanced sum assured plus the higher of Fund
Value and Guaranteed Fund Value.
3. The plan offers discounts at higher guaranteed maturity benefit amounts based on different
bands.
Performance
Let us find out how this plan fares from its cost-benefit analysis, which is based on certain
assumptions. For a 26-year-old male individual with the guaranteed maturity benefit (GMB) of
Rs. 75,000, guaranteed maturity option of 300 per cent on GMB and enhanced sum assured of
Rs. 50 lakh for a period of 25 years, the net return (gross of mortality charges) comes to 4.25 per
cent and 8.24 per cent at an assumed growth rate of 6 per cent and 10 per cent, respectively.
These returns are well above the minimum return prescribed by the regulator (i.e., 2.25 per cent
for a policy with maturity period of more than 10 years). However, if we exclude the mortality
charges, the net return will be negative.
• Table 2 sums up the performance of the three funds as on Sept. 30, 2009.
• In Enhancer fund, 28.44 per cent investment is made in equities. Out of this
investment, 25.40 per cent, 13.21 per cent and 11.17 per cent go to banking,
oil & gas and capital goods, respectively as the top 3 sectors.
• All three funds (Protector, Builder and Enhancer) have cash allocation,
including money market instruments, in the ratio of 18.98 per cent to 11.20
per cent to 17.38 per cent, which may prove to be a boon for the funds in
months to come as the market may see some correction in the near term.
• However, the average maturity of debt holdings is 5.14 to 6.72 years which
can be fatal in the near term as the market can see unwinding of the
monetary policies which will shoot up debt yields, leading to devaluation of
the portfolio. Higher the interest rate, lower will be the average duration and
debt value, and vice versa.
A comparative analysis of BSLI Dream Plan with other investment products (Table 3) throws up
some interesting facts.
• In case of Dream Plan, for a 30-year-old male individual opting for a GMB of
Rs. 75,000 (100 per cent GMO) with an enhanced sum assurance of Rs. 50
lakh, the annual premium comes to Rs. 13,378 for 20 years with a maturity
benefit of Rs. 1.82 lakh. The total premium paid in a span of 20 years
exceeds the maturity benefit at both assumed interest level of 6 per cent and
10 per cent, thus, giving a net negative return. It happens because most of
the premium amount goes in providing insurance cover of Rs 50 lakh. But if
he invests in a combination product of PPF and a normal term plan for the
same insurance cover of Rs. 50 lakh, his annual premium comes to Rs. 5,200
and the return is 3.39 per cent.
• In BSLI Premium Back Term Plan, the same benefits come at an annual
premium of Rs. 42,422 with a maturity benefit of Rs. 8.4 lakh. But the net
return is zero.
Tax benefits
• Premium payable under BSLI Dream Plan up to Rs. 1 lakh is eligible for tax
benefits under Section 80C.
• Maturity or death proceeds are tax free under Sec 10(10D).
• The plan is preferably for an individual looking for an enhanced basic sum
assured.
• The policy administration charge and mortality charge are exorbitantly high.
• Opting for riders will further reduce your return as units will be reduced in
proportion to cover the monthly rider premium charge.
Recommendations
• For whom – Conservative investors willing to put money for a longer period
• Risk – Safe capital; maturity benefits linked to market returns
• Investment horizon – 5-25 years
• Returns – More in comparison to customised investment product providing
same benefit
• Beats inflation – No, it won’t be able to beat inflation at an assumed growth
rate of 6 per cent
• Tax bracket – Preferable for all tax brackets
• Alternatives – Term plan with the return of premium option, PPF with term
plan
Summing it up
BSLI Dream Plan is ideal for those who are looking for an enhanced sum assured with moderate
maturity benefits (in case of 100 per cent GMO). The other GMOs, i.e., 200 per cent and 300 per
cent provide increased maturity benefits but come with high policy administration charges and
mortality charges. In our opinion, the overheads are abrupt and the guaranteed 3 per cent return
also does not look exciting enough. Moreover, investors can lose the trivial 3 per cent return if
premiums are not paid in time.
Related posts:
1.
Anand
Reply | Quote
It is indeed surprising that this is the cheapest ULIP! perhaps you should make a
distinction between small ticket size and cheap.
One wonders who are the people who buy such products and how these products are sold.
Our Country may end up with a generation of under insured and under invested retirees
by the time the regulators do something.
2.
khadar
3.
khadar
Reply | Quote
good ………………………………..
4.
Rajan m nair
Reply | Quote
5.
Rajan m nair
Reply | Quote
6.
Saravanan
Reply | Quote
Rajan m nair :
Shorterm investment like 5 yrs are available.
7.
Sandesh Khanivadekar
Reply | Quote
Its a very intresting and usefull site for review…….still not reviewed 100% but all is
best…
8.
SANDEEP
Reply | Quote
9.
Prasoon Gupta
Reply | Quote
@SANDEEP
Answer: All the things you have to consider first is…
1. what is the need for you about Insurance factor
Insurance in available in Dream Plan..
where is taxsaving in available in both the schemes
2. in case of Market Uncertainity, in Dream Plan – Have option to switch to safer option
without withdrawl during the Policy Term. In TaxSaver Mutual Fund you have only
option to get dividend or redeem after 3 yrs.
10.
Vivek
Reply | Quote
I purchased Agone Religare iTerm. This way I get to pay less premium and then can use
it the way I want. Even to fulfill my othr current needs.
11.
praveen
Reply | Quote
guys all of you thinking that its a good as well as great policy only because the allocatin
chrgs are zero and high coverage. but noone is looking at the administration chrgs its very
high. coz it is charging on the sumassured and the sum assure is minimum 12times.
allocation chrgs are charged only once in the year on ur premium but administration
chrged on sum assured and its monthly and its equal to 30% yearly every year
12.
Kavita
Reply | Quote
@Rajan m nair
Reply back ASAP coz the dream plan is closing on 31st of dec.09
13.
Anant
December 28th, 2009 at 21:03 | #13
Reply | Quote
i dont understand why you compare Birla dream plan with aegon i term + ppf . please
comare as like apple to apple. please compare it with aegon i term + aegon invest
maximiser . waiting for your replay……….
14.
Gopal Agrawal
Reply | Quote
@Rajan m nair
pl contact me
I will be able to help you about this plan
15.
Amar Ranu
Reply | Quote
@ Anant
We at Rupeetalk try to provide the best risk-free alternative to the product under analysis.
Since PPF is a risk-free investment avenue, it is an ideal choice for all risk-averse
investors.
16.
Anjali
Reply | Quote
mahesh poddar
Reply | Quote
18.
manish
Reply | Quote
19.
Umesh
Reply | Quote
@Rajan m nair
Hi Mr. Nair!
I may surely help you with personal financial plannins.
Do write me on my e-mail i/d as furbished in this mail.
Regards.
Umesh
20.
VIKAS
21.
sanjay sharma
Reply | Quote
I hv taken a housing loan but it is not insured kindly let me know how can i get it insured
at a minimum premium and from which insurance company
22.
Vivek G
Reply | Quote
Hi,
I had opted for GMO – 100%, Guaranteed maturity benefit – 173000, basic sum assured
102000 and Enhanced sum assured – 300000, The term period is 20 years, The premium
is 8000 per year.
I was just looking into the account statement and found that Rs.240 is taken as
administrative charge every month. It’s really very high. When I see the fund value it is
7100 from 8000 in just 6 months.
Could anyone please help me with following questions
- how much I will get at end of maturity (after 20 yrs) if I pay all the premiums.
- Will I get (basic sum assured + enhanced sum assured = 402000) – If yes, it looks
attractive, but, the administrative charges scares me.
- Is there a way to reduce the term to 5 years and decrease the basic sum assured, so that I
will be losing less money on administrative charges. If yes, how much is the charge for
that switching.
Thanks,
Vivek G
23.
KAMAL N T
Reply | Quote
Mr.
Vivek G
1 You will get GMB = 173000 minimum at the end of term else the fund value ok
2 In cae of your death in policy term your nominee will get Total sum assured ie. 402000
plus fund value at that time ok
and
3 You may surrender policy after three year any time without paying any surrender
charges in DP You can’t change sum assured ok
24.
rishabh parakh
Reply | Quote
hi,
how can thiese all kind of ULIP products are good and specially like this one where you
are saying that there are no allocaton charges but in reality they are charging 100% for
the first year by stating that the amt is set aside to guarntee your frst premium and the
guarntee is like peanuts 3 or 5 times i.e. 300 % over a period Of 25 yrs and also all the
other charges are also very high, when it comes to insurance buying a term plan and
invest the balance in equity or pther options is the only best option rather than buying
ulips
25.
riteish
Reply | Quote
@Anjali
yes i can help u out u can contact me on my mail id nath070@gmail.com