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Analysing Indian pension plans and how NRIs should go about buying them Image Credit: Supplied

Dubai: Upon retiring, your regular income flow dries up and meeting day to day expenses can become a problem. A pension plan ensures that your income flow continues well beyond your retirement.

By using pension plans you accumulate a corpus of funds through a lump sum investment or premiums that you pay over a period of time, so that upon retirement, you receive regular payments from your corpus to ensure that the expenses can be met and your future is secure.

What is 'Pension', ‘Annuity’?
A pension is essentially a fund into which a sum of money can be added during your employment years and you can draw periodic payments from this fund once you have retired. This way, a pension continues to provide an income to support you even after your retirement.

An annuity is simply a series of payments made at equal intervals. Apart from making payments for pension plans, other examples of annuities are regular deposits to a savings account, monthly home mortgage payments and monthly insurance payments. Annuities are classified by the frequency of payment dates.

How vital is pension planning for NRIs?

For Non-Resident Indians (NRIs) planning to settle down in India, it becomes mandatory to plan their retirement in advance. In doing this, they have to bear in mind the future value of money, calculate their approximate expenditure and plan their lifestyle.

Here are the different categories of pension plans that are offered in India, which NRIs popularly make use of:

Immediate Annuity: Your pension begins almost immediately after a policy is purchased and a lump sum amount has been deposited by you.

Deferred Annuity: A corpus can be accumulated over a policy term through regular premiums and your pension starts after the term is over.

Annuity Certain: Your pension is paid in a series of payments over a set period of time that can be chosen by you.

Life Annuity: Your pension is paid to you for your lifetime. In case of an unfortunate event, your spouse is entitled to the pension.

With Cover Pension: Your pension plan includes an insurance cover that entitles your dependents to a lump sum amount in case of an unfortunate event.

National Pension Scheme: Managed by the India central government, you can withdraw 60 per cent of the amount at retirement while 40 per cent must be used to purchase an annuity.

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Why NRIs look to invest in Indian pension plans post-retirement?

Why NRIs look to invest in Indian pension plans post-retirement?

Apart from receiving a guaranteed amount of money on a regular basis after you have retired from work, most pension plans also have an included insurance cover that protects you and your family from any possible financial burdens.

Depending on the policy chosen by you, there are certain tax benefits and exemptions that you can avail of in India, and moreover pension plans provide you with unconditional protection from any and all investment risks. You can also enhance your pension plan by adding certain riders (additional benefits) like ‘disability due to accident’ or ‘critical illness’.

Glossary: De-jargonising terms relating to pension plans

Vesting Age: The vesting age is the particular age at which you start receiving your pension payments.

Accumulation Period: This refers to the entire period in which you pay premiums towards the accumulation of a corpus.

Payment Period: The payment period is the entire period during which you will receive the pension after your retirement.

Surrender Value: This is the amount you will receive if you choose to surrender the pension plan before its due date.

Riders: Riders are the additional benefits that you may buy and add to your pension plan. The addition of riders helps you to customize the plan to match your present and future needs.

What should an NRI consider while buying pension plans?

Monthly expenses: Once you retire and a regular source of income is over, your pension needs to cover all monthly expenses.

Inflation: You need to consider inflation because the cost of various day to day things are bound to rise in the future.

Life expectancy: Your pension should ensure that money won’t run out for the remainder of your retired life.

Medical expenses: Money can be needed for health check-ups and any unforeseen medical treatments.

Outstanding loans: Any outstanding loans need to be considered as they can take a sizeable chunk out of your pension.

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How can NRIs know their eligibility for pension plans?

How can NRIs know their eligibility for pension plans?

For most pension plans in India, the minimum age of entry is generally 30 while the maximum entry age is 75 and in most cases, the minimum vesting age is 45 years while the maximum age is 80 years.

When it comes to duration or investment term of the plan, depending on the chosen pension plans the policy term generally ranges from 10 years to 30 years.

While there is no maximum limit on an annual premium amount that is required, the minimum annual premium amount is close to INR50,000 (Dh2,496) in most cases and generally, the premium has to be paid for the same period as that of the chosen policy term.

What documents are needed from NRIs to buy a pension plan in India?

NRIs are eligible to invest in the pension plans just like resident Indians. The additional tax benefit on such plans is also available to NRIs. Basically, an NRI can invest in pension plans if he or she has a PAN (Permanent Account Number) card and a NRO (Non-Resident Ordinary) bank account.

KYC procedure relevant for NRIs when investing in pension plans

The NRI should be between 18 and 60 years of age and should have a PAN card along with a bank account for KYC (Know Your Customer) verification, when applying and investing in an Indian pension plan.

For the KYC process, a NRI would first require a document that proves your age, which can be your government-issued birth certificate, passport, driving license, voter ID card or your high school education certificate. It also requires a proof of NRI Status, which is a copy of valid visa, work permit or an overseas resident card.

To complete the KYC process you also need a document that proves your identity, which, apart from the above, also includes government-issued Aadhaar Card or PAN card. If an NRI cannot furnish either of the two card, the bank or the pension paying branch will need to be contacted for alternative options.

You would also require some sort of local India address proof for correspondence, which is either an electricity bill or a telephone bill of a close relative or family member. The address on the document must be the same as the address mentioned in the application form. Some insurance providers may also ask for medical reports before you can buy a pension plan from them.

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First steps for an NRI looking to invest in pension plans

First steps for an NRI looking to invest in pension plans

In case of existing India-based accounts, the pensioner should let the pension paying branch in India know the fact that he or she is a NRI, and after the branch receives the intimation it should convert the account of the pensioner to Non-Resident Ordinary (NRO) account, as per Indian government regulation.

The pensioner has to also compulsorily provide a ‘life certificate’ issued by an authorised official of the Indian Embassy or the bank’s branch in the country where the pensioner is residing, once in a year, in November. The paying branch will credit the amount of pension due every month to the NRO account of the pensioner.

There are also existing government directives in place for the paying branches to remit the pension amount to the NRI pensioners’ NRO accounts, if the pensioner wishes to do so, or by crediting to his NRE accounts.

What are NRE and NRO accounts?
An NRE account is a bank account opened in India in the name of an NRI, to park his foreign earnings; whereas, an NRO account is a bank account opened in India in the name of an NRI, to manage the income earned by him in India. An NRI can open a joint NRO account with one or more NRIs or Indian citizens.

NRE account is freely repatriable (can be converted to any foreign currency), while the NRO account has restricted repatriability i.e permitted remittance allowed from NRO is up to $1 million (Dh3.7 million), net of applicable taxes in a financial year.

An NRO account is like your regular bank savings account but has certain restrictions. In this account you can deposit your rupee earnings from India such as rent, interest, dividends etc. You can also deposit funds from abroad that are in the form of freely convertible foreign currency. The funds in NRO account are usually from income earned locally, like rent on a property in India or certain capital account transactions like sale of property purchased prior to becoming an NRI.

Six Frequently Asked Questions (FAQs) on NRI pension plans

FAQ #1: What if an NRI is unable to furnish a ‘life certificate’?

As per government rules, the paying branch should return the pension amounts of such NRI pensioners who are drawing pension from them and are unable to furnish the needed life certificate to the main pension sanctioning authority, which will allow the authority to arrange payments to the pensioner at a future date. The change in the citizenship by any NRI pensioner will not affect his or her entitlement to the pension.

FAQ #2: Does pension end after the NRI policyholder's death?

No. Pension does not end after the policyholder's death. Depending upon the type of pension plan selected, either the spouse or a chosen nominee is entitled to the pension after the policy holder's death.

FAQ #3: Can an NRI have multiple pension plans?

Yes. A person can have multiple pension plans with private banks and other commercial pension plan policy providers. However, when it comes to the National Pension Scheme or other pension schemes by the Government of India, a person cannot have more than one.

FAQ #4: What if an NRI surrenders his or her pension plan before maturity?

If you choose to surrender the plan before its maturity, the entire surrendered value is added to your annual income and you have to pay tax on it as per your income slab in India. You will also have to pay back any tax exemptions that you might have availed on the premiums you have paid in the past.

FAQ #5: What are the tax benefits accompanying pension plans in India for an NRI?

Depending on the type of plan chosen, pension plans in India provide certain tax benefits, even if you are an NRI. In most cases, any contributions towards a pension fund can be deducted from your gross India-originated income leading to tax savings. At the time of maturity, you can also withdraw up to one-third of your accumulated pension without paying any tax.

FAQ #6: What is participating and a non-participating pension plan?

A participating plan enables the policyholder to share the profits of the insurance company in the form of bonuses or dividends. In a non-participating plan, the profits are not shared and no dividends are paid to the policyholder. Both these types of plans provide guaranteed life cover.

Popular pension plans offered to NRIs in India

There are a number of financial instruments to choose from based on your goals, age, and financial desires. Various pension plans are offered by top insurance companies India for NRIs that promise higher returns and financial security during the retirement years.

SBI, LIC, Bajaj Allianz, and various other insurance firms offer pension plans for overseas Indians. Most of the insurance companies offer comprehensive pension plans that are designed specially to solve the purpose of retirement planning.

So, with pension plans being a popular option for them to start planning their retirement, in this article the features of few good pension plans are discussed.

• National Pension Scheme for NRls:

Anyone between the age group of 18 to 60 years of age can put their money in the government launched New Pension Scheme. The minimum subscription under this scheme is INR6,000 (Dh300) on yearly basis.

Moreover, 50 per cent of investment money is allocated to stocks. National Pension Scheme gets matured at the age of 60 years. However, you can withdraw the corpus amount if it is lesser than INR200,000 (Dh9,987).

• SBI Life Annuity Plus:

With SBI Life Annuity Plus, you receive a comprehensive range of annuity options on just a single premium payment. Thus, you are assured of regular annuity or pension for the rest of your life.

The plan provides an option where a Non Resident Indian can choose between a plan that provides only pension and a plan that provides an extra cover along with the plan.

The policy also promises certain amount as a percentage of the premium every year. There is also an option to choose other insurance covers (covers against accident) along with this plan.

• Aviva Pension Schemes:

The Aviva Secure Pension plan provides certain sum of amount over the premiums for the first few years of the plan. The minimum sum assured starts from INR100,000 (Dh4,993) and there is no maximum limit on the sum assured.

For the Aviva Secure Pension plan, premiums can be paid on monthly, quarterly or half yearly basis. The company calculates the premium that has to be paid based on sum assured and frequency of premium payment.

The Aviva Pension Builder plan is a scheme wherein the minimum amount paid as premium in a onetime premium payment policy is INR200,000 (Dh9,975). For a policy with 10 yearly premiums it is INR30,000 (Dh1,496).

The Aviva Pension Builder policy is of limited premiums for a short term and the premiums are payable on yearly basis. The policy holder also has an option to withdraw 0.333 percent of the amount at once during maturity and the remaining amount will be paid as annuity.

• Life Insurance Corporation (LIC) Jeevan Nidhi Plan:

It is widely seen as one of the most popular and suitable pension plans for NRls as it offers five different plan variants to choose from. You can choose to get the annuity for a lifetime, or choose to get it for a fixed interval of 5, 10, 15, 20 years irrespective of the survival period.

You can also opt to get a return of the purchase price in case of death, and payment of 50 per cent of annuity to the spouse in case of death of the policyholder. Moreover, you can avail 3 per cent increment of annuity every year and opt for various other insurance benefits available with this plan.

• Bajaj Allianz Life Pension Guarantee Plan:

This plan is designed by Bajaj Allianz Life Insurance and the first annuity will be paid in the first month, third month, sixth month or one year after policy inception based on the payment mode that you choose— be it every month, every three months, every six months or annually respectively.

The minimum age criterion to buy this plan is 37 years and the maximum age limit is 80 years. This plan provides immediate annuity options like an annuity for lifetime return of the purchase price upon the death of the annuitant, and an annuity for a specific period of 5, 10, 15, 20 years till lifetime.

• Prudential’s PRUSave Limited Pay:

PRUSave Limited Pay is a plan designed to help you save for the long term, but gives you the option of paying off your premiums within a shorter period.

The plan has an option where an NRI can choose to hold the amount accrued for about 5 to 10 years after the premium payment term.

The NRI can also choose the annuity payback turn from a wide range of options in years. There is also a loan facility for medical purposes and the loan is free from interest rate.