I got an email recently indicating that a pension plan offers 1 lakh monthly income for life long if I can pay ₹ 69,000 per month for 15 years. If I get into details, it is ICICI Prudential Life Insurance that offers “Guaranteed Pension Plan Flexi,” which promises a guaranteed lifelong income with flexible investment options. While this email was purely marketing gimmic, how does this compare to investing in mutual funds? Among ICICI Guaranteed Pension Plan Flexi Vs Mutual Funds, let’s analyze both options to see which one is better for long-term wealth creation and retirement security.
About ICICI Guaranteed Pension Plan Flexi
The ICICI Pru Guaranteed Pension Plan Flexi is a non-linked, non-participating individual deferred annuity plan (recently LIC Smart Pension Plan was launched which was immediately annuity plan) designed to provide policyholders with a guaranteed income post-retirement. It offers flexibility in premium payments, deferment periods, and annuity options to cater to diverse retirement needs.
Features
- Premium Payment Term (PPT): Policyholders can choose a PPT ranging from 5 to 15 years, allowing customization based on financial capabilities and retirement timelines.
- Deferment Period: The deferment period, which is the time before annuity payments commence, can be aligned with the PPT, ranging from 5 to 15 years.
- Annuity Options: The plan offers multiple annuity options, including single life and joint life with or without the return of premium, catering to individual and spousal financial security.
- Flexible Payout Frequencies: Annuity payments can be received monthly, quarterly, half-yearly, or annually, based on the policyholder’s preference.
Benefits
- Guaranteed Lifelong Income: The plan ensures a steady income stream throughout the annuitant’s life, providing financial stability in retirement.
- Return of Premium Options: Certain annuity options offer the return of the premium to beneficiaries upon the annuitant’s death, ensuring legacy planning.
- High Premium Benefits: Higher premiums unlock additional annuity benefits as a percentage of the annuity rates, enhancing the income received.
Investing ₹69,000 per Month for 15 Years to Receive ₹1 Lakh per Month for Life: How Far Is This True?
Here is the email what I got.
To evaluate this proposition, let’s consider a hypothetical scenario:
- Total Investment: ₹69,000 per month × 12 months × 15 years = ₹1,24,20,000
The annuity received depends on various factors, including the annuitant’s age at the time of purchasing the annuity, the chosen deferment period, and the specific annuity option selected. Annuity rates are determined based on these parameters and are subject to change.
While the plan offers guaranteed income, achieving a ₹1 lakh per month annuity would require specific conditions to be met, such as the annuitant’s age, the deferment period, and prevailing annuity rates at the time of annuity purchase. It’s essential to consult the latest annuity rates and use the ICICI Pru Guaranteed Pension Plan Flexi calculator to determine the exact annuity amount for your specific scenario.
How This Compares to Investing in Index Funds or Flexi-Cap Funds?
Instead of investing in a guaranteed pension plan, what if one invests in an index fund generating 12% annualized returns or an actively managed flexi-cap mutual fund yielding 13-15% returns? Let’s compare:
Scenario 1: Investing in an Index Fund (12% Annual Returns)
- Total Investment: ₹69,000 per month for 15 years
- Final Corpus at 12% CAGR: Approximately ₹3.2 Crores
- Post-Retirement Withdrawal: Assuming a 6% withdrawal rate, one could withdraw around ₹1.6 lakh per month indefinitely while preserving capital. Even if we take consider 4% withdrawal rate one can withdraw around ₹ 1.3 Lakhs per month indefinitely while preserving initial capital assuming 10% returns.
Scenario 2: Investing in an Active Flexi-Cap Fund (13-15% Annual Returns) for risk takers
- Total Investment: ₹69,000 per month for 15 years in one of the Top Flexicap Mutual Funds. Since such funds invests in midcap or smallcap funds too these are riskier.
- Final Corpus at 14% CAGR (average): Approximately ₹3.8 Crores
- Post-Retirement Withdrawal: With a 6% withdrawal rate, one could withdraw ₹1.9 lakh per month while still growing the corpus over time.
Key Takeaways from This Comparison
- Higher Monthly Income: Investing in index or flexi-cap funds can provide significantly higher monthly withdrawals than a pension plan.
- Liquidity: The invested amount remains accessible in case of emergencies, unlike annuity plans where funds are locked.
- Inflation Protection: Market-linked investments grow over time, providing better inflation-adjusted returns compared to fixed annuities.
Hidden or Negative Factors in Such Pension Plans
- Inflation Impact: The guaranteed income is fixed and does not account for inflation, potentially reducing purchasing power over time.
- Taxation: Annuity payouts are subject to taxation as per the individual’s tax slab, which could reduce the net income received.
- Liquidity Constraints: Once invested, accessing the lump sum is challenging, limiting financial flexibility in emergencies.
- Annuity Rates Variability: Annuity rates are not fixed and can change based on economic conditions, affecting the expected income.
Conclusion: The ICICI Pru Guaranteed Pension Plan Flexi offers a structured approach to securing a lifelong income post-retirement with flexible investment options. However, the specific claim of investing ₹69,000 per month for 15 years to receive ₹1 lakh per month for life depends on various factors, including age, deferment period, and prevailing annuity rates.
When compared to market-linked investments like index or flexi-cap funds, pension plans may not be the most optimal choice for wealth creation and post-retirement income. While they provide certainty and peace of mind, their rigidity, lower returns, and lack of inflation protection make them less attractive compared to well-diversified equity investments.
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Nice comparison, these annuity plans the moment you ask them IRR they run away
Very good comparative analysis and it clearly brings out the marketing gimmicks being played by insurance companies .
Thank you
Absolutely correct analysis and interpretation.
Thank you Kamalji