Skip to main content

Retirement Plan: Secure your golden years

 

You can choose from the retirement products offered by insurance companies and mutual fund houses. You can also opt for New Pension Scheme

GOLFER Chi Chi Rodriguez once said when a man retires, his wife gets twice the husband but only half the income.


Retirement isn't only about gardening or playing with grandchildren. If not planned right, life can become a pain. While on the other hand, if planned well, it can be the best stage of your life. Financial Chronicle shows you how you can use a variety of retirement products to enjoy your golden years.


Peaceful retirement ll life insurance companies have a strong A focus towards retirement or pension products. Insurers offer two kinds of retirement products. One in which the corpus is built over the years by regular investment and the corpus is then annuitised (breaking of corpus into monthly instalments). The pension amount depends on the age when monthly pension is to begin and average life expectancy.

The other kind of product offered by insurers is annuity, where the customer gives a lumpsum amount to the insurance company and the amount is annuitised and the insurance company starts paying pensions to the customer.

Pension products can be on the traditional or unit-linked platform. In a traditional platform, returns are guaranteed and moderate.


Whereas, in a unit-linked pension plan, the risks of investment lies with the customer, but if he decides to chose to allocate his investment in equities, he can enjoy higher returns in the long term.

Experts say that young customers looking at retirement solutions should take higher risks and invest in equities, whereas, if your retirement age is not very far away, you must look at safer debt instruments for parking your investments.

Managing finances during retirement would be extremely tough if one hasn't planned for retirement. The key is start investing for retirement early in life.

At present, all major insurance companies are offering traditional pension plans. Apart from the Life Insurance Corporation of India (LIC), which also controls 95 per cent of the annuity business, none of the private insurance companies are offering a regular pension plan because as per present regulations, insurance companies have to offer a minimum guarantee of 4.5 per cent returns to its customers, which insurers find difficult to offer.

However, the Insurance Regulatory and Development Authority (Irda) is in the process of amending guidelines to ensure more pension products are available for customers to choose from. The regulator has already issued draft guidelines for new pension norms and has invited comments from stakeholders.

We have not been able to calculate a formula to offer a long-term guarantee of 4.5 per cent on a unit-linked insurance plan (Ulip) platform. Irda is expected to make changes in pension norms. At this point, there is a huge gap between demand and supply of pension plans. There is no social security in India, hence, the need for pension is strong. Pension products have been one of the highest-selling product categories.

New Pension Scheme another option one can look at is the New A Pension Scheme (NPS). The charges in the scheme are very low compared with those charged by insurance companies. The minimum amount of investment required in this scheme is Rs 6,000 annually. NPS has been introduced by the government and made mandatory for all new recruits to the government, except for the armed forces with effect from January 1, 2004.

NPS was made available to all citizens of India from May 1, 2009, on voluntary basis, but, despite its low cost and customer-friendly structure, it has failed to make much of an impact due to low awareness. In this scheme, the Pension Fund Regulatory and Development Authority (PFRDA) has appointed fund managers to manage pension fund corpus.

Any Indian citizen between 18 and 60 years can join NPS. At present, only tier-I of the scheme, involving a contribution to a nonwithdrawable account, is open. Subsequently, tier-II accounts, which permit voluntary savings that can be withdrawn at any point of time, can be opened. But to be eligible to open a tier-II account, one needs a tier-I account.


The single major difference between tier-I and tier-II is that tier-II balance can be withdrawn by the investor at any time, but the minimum balance to keep the account operative is Rs 2,000. At the end of financial year, any balance above that can be withdrawn. Both tier-I and tier-II are pension products -they are meant to create a lumpsum on retirement.

Subscribers have two asset allocation choices for investments. The `auto choice' (which allocates based on age) invests in stocks, corporate bonds and government bonds. For example, for individuals up to 35 years old, the auto choice will invest 50 per cent in stocks, 30 per cent in corporate bonds and another 20 per cent in government bonds.

In the `active choice', the subscriber gets to choose, subject to a maximum allocation of 50 per cent in stocks, such that the total 100 per cent is allocated as per one's choice. Once can change the scheme preference from auto choice to active or vice versa once every financial year.

The options for exit are interesting. The normal retirement age has been fixed at 60 years. At 60, you will be required to use at least 40 per cent of your accumulated savings to buy a life annuity from an insurance company. A phased withdrawal is also allowed, but the lumpsum benefit has to be availed of before you turn 70 years. For those looking to exit before turning 60, there is an option to withdraw 20 per cent of the accumulated savings and buy an annuity with the remaining 80 per cent.

If the subscriber dies before turning 60, the nominee can receive the entire pension corpus. Alternatively, a subscriber can exit if the account value falls to zero, or if the citizenship status changes. The age of exit will be reviewed by PFRDA from time to time.
There will also be the option to select an annuity that will pay a survivor pension to your spouse.


Mutual funds asset management companies have also A floated mutual fund schemes that offer another alternative for building a retirement corpus. Mutual fund houses suggest that if one has a 15-20-year horizon, the investor can build his retirement corpus by using a systematic investment plan (SIP). They point out that an investment of Rs 1 lakh in at least 30 schemes during August 2000 would have become at least Rs 5 lakh in August 2011.

Through the SIP route, one can increase their chances of getting better returns because the money in spread across up and downs. The final returns could be higher by at least 100-200 basis points on a compounded annual growth rate basis, if not higher.

One can also opt for balanced funds (that distribute money between stocks and bonds), or asset allocation schemes (recommended on the risk appetite of the investor).

It is best not to put 100 per cent of your money in stock mutual funds. One can do SIPs in balanced funds. The debt portion is a comforting factor that a certain portion of your money will never really fall. In that sense, an asset allocation scheme is ideal for conservative investors. Once confidence builds, you can take some calculated bets if your retirement corpus is going to be used only after 1520 years.
 

Popular posts from this blog

ICICI Prudential Dynamic Plan Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   ICICI Prudential Dynamic Plan             Invest Online This fund does remarkably well during falling markets, but fails to show the same prowess during a rising market. The fund sticks to its mandate to adapt to the dynamic nature of the market by shuttling between debt and equity. It takes aggressive asset calls in equity when the market surges by investing in quality mid-cap stocks. At the same time, it adopts a defensive strategy by investing in debt and cash when markets get overvalued, making it a good long-term choice.     For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call     Leave a missed Call on 94 8300 8300   Leave your comment with mail ID and we will ...
Read more

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...
Read more

Mutual Fund Review: ING Dividend Yield

  ING Dividend Yield's small assets enable the fund manager to churn in impressive returns… Strategy The aim of the fund is to invest in stocks which offer a high dividend yield. This fund deploys a value based strategy which aims to gain from investing in fundamentally strong and free cash flow generating businesses. The scheme focuses not only on growth but also on the cash generated by the business, which mostly leads to stable returns even in volatile markets. This fund has a low volatility because of its investment in high yielding stocks. The scheme tries to include stocks that yield dividend above the dividend yield of the Nifty and stocks with liquidity, which throws up a universe of 150 stocks.   Our View Launched in October 2005, this fund invests at least 65 per cent of its assets in high dividend yield stocks. The fund has consistently maintained a mix of stocks across varying market capitalisation, with a higher tilt to mid caps compared to small caps. Howev...
Read more

Financial Planner - Do Integrity & Dependability Check

How does one can find value proposition when it comes to financial planning, which is a new area? There is nothing to benchmark it with. So, how does one figure what is the right fee to pay? Look at what you want. You probably want to hire a financial planner to get a blueprint for your life ahead and want to know how to achieve your goals. For creating a tailor-made financial plan, our experience is that it takes 25-30 man-hours in all. Taking an average of Rs 500 per hour for hiring the services of a qualified financial planner like one who has a CFP(CM) certificate, the fee would come to Rs 12,500 to Rs 15,000. But the per-hour rate can be higher or lower depending on the process adopted, the experience and expertise of the planner, etc. That's how planners arrive at their fee. Now, is that value for money? For that you need to find out what benefits you would derive by engaging them. The financial plan will give you clarity, direction and pathway to achieve your goals. Th...
Read more

About CRISIL IPO Grading

CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy / sell or hold the graded instrument, or a comm...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now