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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.
 

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