HDFC Life has a pension plan. The HDFC Life Pension Guaranteed Plan. And it’s a totally misleading product you simply shouldn’t buy. Here’s why.
They advertised with this strange ad (thanks to @nagpalmanoj for noticing the ad and posting on twitter!)
You know what’s wrong in this picture?
The “rate”.
This is a product where, let’s say:
- You’re 50 years old.
- You buy this product for 50 lakhs
- You don’t get anything back for 10 years (“deferred”)
- Then you get back Rs. 50,141 per month for life.
- And after you die, your money is returned (around 110% of the money you pay = 55 lakh)
Is this 12.54%?
Oh you could do the really stupid thing and say: Come on, Deepak, 50,141 per month is Rs. 601,692 per year. On 50 lakh rupees that’s about 12.03% no? Close enough?
But come on.
What happened in the first 10 years? Your hard earned money is working for someone, no?
The money will grow. Then they will use the grown money to give you a return. That return is guaranteed to be Rs. 50,141 per month for the rest of your life.
So how much is the real return?
It’s like this.
You first give them 50 lakhs at age 50.
Then you sit quietly for 10 years.
When you turn 60, they will start giving you Rs. 50,141 per month.
Let’s say you live till the ripe age of 100. You keep getting this Rs. 50,141 per month.
Then you die. Your nominee will then get your Rs. 50 lakh principal plus another 10% = Rs. 55 lakh.
If you assumed a constant interest rate through out this period, and started with 12% a year, then at the age of 100 you would be left with the princely sum of Rs. 98 crores. Since they are not giving you 98 crores, but only 55 lakh, obviously the return is lesser than 12%.
Remember in maths papers when you wouldn’t know the answer and you’d say ok boss 12 is too high. Maybe lets try with 11?
You relive those years now. Start with 11%. That’s still gonna leave you with 57.3 crores. Too much. We need to be left with only 55 lakhs at the end.
10% is 32 crores. Keep going. You’ll reach the final answer at about 6.4%.
What’s the answer?
The advertisement should read like this:
We give you 6.4% taxable income after keeping your money for 10 years.
We know that you can get higher than this today buying a fixed deposit today, but hey we are a big insurance company with a four letter word.
No one makes ads like this, apparently, and I’ve been told I shouldn’t pursue a career in advertising.
Anyhow, here’s how the graph will look if you got an instrument that gave you 6.4%, reinvested for first 5 or 10 years, used the same payout they mention and kept it for till the age of 100:
As you can see, the taxable yield is 6.4%.
The full working is in this online excel sheet you can see and use for your benefit.
How Can I Build My Own Annuity Product?
If you don’t mind taking some rate risk, what you can do right now is to buy a long-term debt mutual fund, in the growth option. Then, set up a withdrawal plan to draw out Rs. 50,141 per month forever.
That will give you similar income, and it’ll be taxed at far less (due to indexation and lower longer capital gains taxes) In fact you can save 80% taxes through this route – we have a detailed post on this.
In fact, if you get something like 7.5% on such a mechanism on average, you could withdraw Rs. 63000 per month for the rest of your life – and at much lower taxes.
The risk is that rates fall tremendously, to say 3% in the market. You could mitigate this by buying longer term government bonds (some are available till 2045 maturity) but today, the buying of such bonds is a little difficult for people like us. However, we hope this will change in the future.
But the difference is so much that it’s totally not worth buying this HDFC Life Pension Guaranteed Plan.
We hope this helps you understand why:
- Any interest rate mentioned by an insurance company is usually BullShit (BS)
- And how you can identify that BS
- And therefore, avoid that BS.
Comments to @deepakshenoy.
Sorry I’m singling out insurance companies, but they are the only people that get away with doing this kind of BS. No one else can advertise high rates and actually deliver a completely different lower rate. This is the financial equivalent of pond scum.
