Insurance Basics

Traditional vs. Unit Linked Pension Plan - Which One Should You Opt For?

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There used to be a time when endowment plans were all that was available in the insurance market. With passage of time, more innovative plans like ULIPs or unit-linked plans were made available to the consumer. More choice is a good thing, so long as the consumer selects the plan most suited to his needs and risk profile.

A person looking to save for retirement has the option to opt for Traditional Pension Plans or Unit-linked pension scheme

He must select the one most suited for him given his financial goals.

It helps to first understand how the two plans differ from each other over the following areas:

 

Pension ULIPs vsTraditional Pension plans

  ULIPs Traditional endowment plans

Investments

Allocation to equities, bonds, gsecs, money market, depending on the option

Larger allocations to bonds, gsecs, money market, smaller equity allocation

Expenses

Lower agent commissions, higher fund management charges

Higher agent commissions, lower fund management charges

Flexibility

High

High

Transparency

High

High

Investments
Endowment pension fundsusually invest in government securities, corporate bonds and the money market. Investments in stock markets are limited. While this is how it works across endowment pension schemes in general, the details vary across insurers. The objective is to offer stable returns, as opposed to high returns marked by volatility.

Unit-linked pension plans pursue a relatively fluid investment style. They can invest across stocks, government securities, corporate bonds and money market instruments, with the explicit aim of maximizing returns for the investor.

Flexibility
Endowment pension plans do not fare favorably on flexibility. Individuals are invested in the same plan throughout the tenure. They clock returns at a particular level. If they aren’t satisfied with the returns they cannot choose to switch to another plan, simply because there isn’t any other plan under the endowment pension fund.

Pension ULIPs have various options under the pension fund that allows individuals to select the one most suited to them. For instance, an investor with high risk appetite can go for the equity plan, while a low risk investor can opt for the income plan and the medium risk investor can select the balanced plan. Switching across plans is permitted.

Transparency
Pension ULIPs are more transparent than traditional pension plans in the following areas:

NAV
ULIPs are market-linked. The value of the underlying investments is captured by the NAV and is published by the insurer. With access to the NAV, investors know where their ULIP stands and they can calculate the performance over various time frames.
Endowment pension plans do not have any concept of an NAV.

Portfolio Disclosure
Pension ULIPs disclose their portfolios at regular intervals so the investorhas a good idea of where their money is being invested. It tells the investor whether the fund manager is managing the ULIP in line with the equity-debt investment allocation.

Expenses
Pension ULIPs are generally more transparent than endowment pension funds with regards expenses / costs like fund management expense, mortality expense, distributor commissions, administration expense, among others. The investor knows exactly how much money is being invested in the markets and the costs he is incurring on the ULIP.

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