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

Rs 14,000 Crore worth of tax free bonds coming soon from NHAI , PFC

  NHAI, PFC file prospectuses, coupon rate not yet decided MORE debt investment options have opened up for investors with AAA rated tax-free bonds worth over Rs 14,000 crore lined up. The National Highway Authority of India ( NHAI ) and Power Finance Corporation ( PFC ) are offering Rs 10,000 crore and Rs 4,033.13 crore worth of tax-free bonds, respectively, as per prospectuses filed with the Securities and Exchange Board of India (Sebi). Of a Rs 5,000 crore issue by PFC, Rs 966.87 crore has already been raised through private placement on September 28 and November 1. Tax-free bonds give investors tax-free return on any amount invested. In another kind of bonds, the long-term infrastructure bonds, investments up to Rs 20,000 are tax exempt, that is this cap amount can be deducted from the taxable income. Accordingly, the NHAI prospectus has clarified that only the amount of interest from -and not the actual investment on -its new bonds will be tax-free. "NHAI's publ...
Read more

Change in Fund Manager for some of HSBC Mutual Fund Schemes

Buy Gold Mutual Funds Invest Mutual Funds Online Download Mutual Fund Application Forms Call 0 94 8300 8300 (India) However, this facility is only available to Unit holders who have been assigned a folio number by the AMC.   HSBC Mutual Fund has announced that the below mentioned schemes shall be managed by the new fund managers as stated in the table. The effective date will be July 02, 2012.   Amaresh Mishra 's will be Vice President and Assistant Fund Manager. Having done a Post graduate diploma in Business Management and Bachelor of Chemical Engineering, he has over seven years of experience in Equities and Sales.   Mr. Piyush Harlalka's designation shall be Vice President- Fixed Income. Qualified as a C.A., C.S. and holding M.B.A.( Finance degree), he has over six years of experience in Fund management and ...
Read more

How EEE and EET Tax affect Retirement Investments

  An important factor while choosing a financial product is its taxation , and for retirement savings, this is even more important as the sums involved are usually life-long savings. Here's a look at the current tax treatment of three major long-term retirement planning products, which are - Employees' Provident Fund (EPF), Public Provident Fund (PPF) and National Pension System (NPS). EPF The tax treatment is EEE, which means your money is exempt from taxes at the time of investment, accumulation and withdrawal. At the time of investment, the tax deduction is under the limit of section 80C of the Income-tax Act , which is currently Rs 1.5 lakh. Partial withdrawals are also tax-free if made after 5 years of continuous service. If withdrawals are made before 5 years of service, 10% tax will be deducted at source. Exceptions have also been provided for transfer of amount and conditions wherein the subscriber is unemployed for more than 2 months or the loss of job was beyond th...
Read more

Personal Finance: You can insure your wedding

But luck may not always be on your side. With the frequency of such attacks, as also other risks and unforeseen accidents growing, a wedding insurance is something you may want to look at if a marriage is being planned in the family. Event insurance plans like this is still in its nascent stages due to low awareness. And given the sacred nature of the ritual, nobody wants to discuss or think negative. But as wedding spends and risks grow, it makes sense to cover the potential monetary loss. The policy in those countries even covers the loss of the wedding ring, the wedding gown not reaching on time and even the expenses/loss due to late or non-appearance of the photographer which may mean staging the event once again for the photograph. In India, most insurance companies — including ICICI Lombard General Insurance, Oriental Insurance, Bajaj Allianz and National Insurance — offer wedding insurance. The policy is tailor made to individual requirements and needs. The sum insur...
Read more

DSP BlackRock MidCap Fund

Best SIP Funds Online   HOW HAS DSP BlackRock Small & Mid Cap Fund PERFORMED? With a 10-year return of 14.61%, the fund has outperformed both the category average (12.34%) and the benchmark (10%) by a good margin. Should you invest in DSP BlackRock Small & Mid Cap Fund? This fund invests predominantly in mid-cap stocks but takes a sizeable exposure in small-caps as well. The focus is on nascent companies with high growth potential. The fund manager places emphasis on quality and avoids inferior businesses even if these look tempting from a valuation perspective. Over the past year, the fund portfolio has grown, having added to some of the underperforming sectors like chemicals and healthcare. Its portfolio churn has come down significantly. The heavily diversified portfolio is run completely agnostic of its benchmark index— most bets are from outside the index—which can at times lead to bouts of underperformance as seen in the recent years....
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