Pension
Retirement opens up a new phase of life in an individual’s life. You finally have the time to check all the things on your bucket list. Hence, you need adequate funds so that you don't have to compromise on your lifestyle during those post-retirement years.
In the absence of a regular source of salary or income, you have to rely entirely on your savings and investments.
Living costs will rise by the time you retire. You also have to take into account medical emergencies and other unforeseen expenses. Thus, to fund your old-age expenses, you need careful planning.
Pension funds can provide a supporting income, letting you enjoy complete financial freedom in your golden years. Let us understand a bit about pension funds.
What are pension funds?
Pension funds are financial tools that help you in accumulating funds for your post-retirement years. By investing a certain amount regularly towards your pension fund, you will build up a considerable sum in a phase-by-phase manner. They generally have two stages–
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Accumulation stage: You pay a specific amount regularly until you retire.
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Vesting stage: Once you retire, you get a steady flow of income for life.
Types of Pension funds in India.
1. NPS
The government of India introduced the National Pension Scheme (NPS) as a financial cushion for retired persons. Some of its features are as follows:
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You have to invest in this scheme until 60 years of age.
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The least sum you must invest is ₹ 1000/-. There is no upper limit.
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Your money will be invested in debt and equity funds based on your preference.
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The returns depend on the performance of the funds you choose.
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When you retire, you can withdraw 60% of your savings.
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You must use the remaining 40% to buy an annuity – a retirement plan offering periodic income.
Start NPS Account And Get PRAN Card
2. Public Provident Fund (PPF)
PPF is a long-term investment scheme with a 15 years tenure. Thus, the impact of compounding is enormous, especially towards the end of the term.
Every year you can invest a maximum of Rs.1.5 lakh in your PPF account. You can pay upfront or through twelve installments staggered over the financial year. Your PPF investments are eligible for deductions* under Section 80C of the Income Tax Act, 1961(ITA).
The government sets the interest rate on PPF every financial quarter, based on the profits from government securities. The funds are not market-linked.
3. Employee Provident Fund (EPF)
EPF is a government savings platform for salaried employees. Both your employer and you have to make equal contributions towards your EPF account. Your share is removed from your salary every month. The Employees' Provident Fund Organization (EPFO) sets the interest rate on the investment. On retirement, you receive the total funds contributed by you and your employer along with the accrued interests.
4. Annuity plans with Life Insurance
Such plans provide a life cover along with a regular source of income. If an unfortunate event occurs while the plan is active, your family member receives a lump sum payout, however, there are other options too that do not offer this financial coverage. Annuity plans are of two types:
A. DIFFERED ANNUITY
It is a contract with an insurance provider helping you build a retirement corpus. You can make a single lump sum payment or pay regular premiums over a fixed time frame – the policy term. Thus, this scheme helps you invest as per your resources.
When the policy period ends, your pension starts. If your retirement date is far in the future, this plan is suitable for you.
B. IMMIADATE ANNUTY.
It is a contract between an individual and an insurance company, wherein the individual pays a lump sum amount and receives guaranteed~ income for a lifetime, starting almost immediately.
LIC Of India’s Guaranteed Pension Plan is one such retirement policy that offers both Immediate and Deferred Annuity options. It offers several benefits:
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A lifelong guaranteed~ income
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Eleven annuity options, including pension for your spouse/family member or return of purchase price to your nominee in your absence
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Options to avail income on a monthly, quarterly, half-yearly, or annual basis
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Top-up option to systematically increase your annuity income
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Attractive discounts for NPS subscribers or existing customers
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Tax benefits* on the premiums paid
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Option for lump sum payout on the diagnosis of critical illnesses or permanent disability is covered under the plan
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Options to get back the purchase price earlier in your lifetime
Thus, this plan secures you against all age-related exigencies and can be a lucrative financial cover in your retirement years.
4. Retirement Solution by Mutual Funds
Pension plans from insurance companies, National Saving Certificate (NSC), Employee Provident Fund (EPF) and Public Provident Fund (PPF) are the savings instruments that come to mind when planning for retirement. Many of us don't even make adequate plans for retirement and end up depending on our daughters and sons. However, if you are not averse to taking a bit of risk with your money, mutual funds are a great investment for your retirement years. The earlier you start saving for your superannuation, the more corpus you'll have when the time comes. Though there are retirement-targeted mutual funds, you may also opt for a regular equity, debt or hybrid fund on a long-term basis for wealth creation.
Why Mutual Fund?
Here are some of the reasons to consider mutual funds for retirement planning:
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Low cost: Mutual funds do not require high inputs. Most retirement funds need an input of just around Rs. 1,000 per month. However, choose a fund that has limited fees and charges such as entry and exit load, fund management charges, etc.
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Beat the inflation: As you grow older, inflation could also rise, making the cost of living higher by the time you are 60 years old. This means that you need to invest in an instrument that also grows at par with the inflation rates, or better. Growth mutual funds are ideal under such a situation.
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Liquidity: If your fund does not have a lock-on period, you can liquidate your fund and withdraw money whenever you want. It takes less than 2 days for the amount to be credited to your account once you sell of the units. Lock-in periods are usually as short as 3-5 years, unlike pension schemes such as PPF that has 15-year lock-in period.
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Tax efficient: Short-term gains (less than 3 years) on equity funds attract a tax of 15%, while short-term debt fund gains are added to your regular income and taxed as per the income tax slab you fall under. On equity funds, there is no tax on long-term capital gains, but long-term debt fund gains are taxed at 10% without indexation and 20% with indexation.
Choosing the Best Retirement Plan:
Before you buy a mutual fund, you need to do some research to find the fund that is the most suitable for you. The things you need to keep in mind while doing the research are:
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Years left for retirement: If you are in the early years of employment - that is, between 22 to 35 years, then you may want to choose a moderate risk fund with steady investment growth and appreciating returns. The older you grow, the more aggressive your investment might need to be, to ensure that at the end of the day you will have enough money to beat inflation during retirement. You may want to plan your savings in such a way that you can live comfortably after your employment years.
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Risk tolerance: As an investor, you may have a risk level that you are at ease with. Some people are overcautious, some are prudent, and many more are aggressive risk takers. Choose a fund that has a risk level of your standard.
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Fund goal: Depending on whether you are looking for investment growth or stable savings, you could go for equity funds, debt funds, hybrid funds, growth funds, value funds, etc. There are several options in the mutual fund market. You could mix and match portfolios and fund types to achieve the right level of diversity, capital increase and steady income.
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Fees and charges: Compare the exit and entry loads, management fees, redemption fees, etc. between different funds before buying one. In all funds fee charged as per AMFI Guideline; hence, it is not high and much important.
Preferred age for Retirement Planning for Investors between 25 and 40 Years of Age.