Retirement planning is a critical component of financial planning. One can consider including pension plans of mutual funds, new pension schemes, provident fund and pension plans launched by life insurance companies to save money for retirement.
Retirement planning is an inherent part of financial planning process. Although it is considered as very critical goal still most of the times people do not keep it on priority while saving. You may be a 25 year old professional just starting your career or a 50 year old nearing retirement, retirement planning cannot be overlooked.
Government sector employees get regular pension after retirement. However, private sector employees and self- employed individuals have to prepare for their golden years. Therefore, importance of retirement planning is increasing day by day for an individual. The pre-retirement phase which is also known as ‘accumulation phase’ can be used to plan for retirement with various products available in the market.
The proportion allocated towards retirement planning in a plan depends upon many factors such as, current standard of living, expected inflation during post retirement phase, expected rate of return from the investments. Let us discuss various products which can be used to invest wisely for retirement planning.
1. Pension plans of Mutual Funds: Mutual funds are the best way to plan for retirement. They offer liquidity option with minimum charges and are successful in creating long term wealth. Till now only three mutual funds companies offer pension plans, they are – Franklin Templeton, UTI and Reliance Mutual Fund. While Franklin and UTI offer Debt oriented plan with only 40% equity exposure, Reliance offer equity oriented plan with 60% minimum of equity exposure. The amount invested is eligible for tax exemption under Sec 80 C. Also the exit load is high to discourage investor to withdraw funds and stay invested for long term. Although, a plain vanilla mutual fund scheme can also help in planning retirement still the lock in feature and exit loads make pension scheme better positioned as compared to other schemes.
2. Provident Fund: There are two types of provident funds available in India - Public Provident Fund and Employees Provident Fund. Both are popular means to save for retirement. Employees Provident Fund (EPF) is only for employees of an organisation wherein the contribution is deducted from the salary of the employee. Employer also contributes into the funds up to the limit as prescribed in the act. Employee can redeem the fund once she is out of job after obtaining NOC from past employer.
Public Provident Fund (PPF) account on the other hand is available for general public. One can open PPF account at select banks or Post office. The PPF account has lock in period of 15 years. However after 7 years one can withdraw the amount according to the rules. Self-contribution in both accounts is eligible for tax exemption under sec 80 C.
3. National Pension Scheme: NPS is a defined contribution based pension scheme launched by the government. The scheme is compulsory for government employees and optional for private employees and self-employed. Any Indian Resident between the ages of 18-55 is eligible to invest. The scheme is structured into two options:
a) Tier – I account: This account is mandatory for all government servants who will make a contribution out of his salary and government will also make an equal contribution. In case of private sector employees there will equal contribution from his employer. The withdrawal is not allowed before retirement age i.e. 60 years. The amount invested into this account qualifies for deduction in Income tax.
b) Tier – II account: This account is optional for government employees in which there will be no government contribution. Private sector employees can also invest into this account. This account permits withdrawal prior to the retirement age. No tax benefit is available on investment in this account. However, to open this account an investor needs an active Tier-1 account.
4. Pension plans of Insurance: Many insurance companies have launched pension plans which aim at providing pension to the insured after retirement. There are two types of pension plans – unit linked pension plans and traditional endowment plans. 80% of the pension plans in the industry are endowment plans. The unit linked plans generate returns which are linked to the equity markets and bond markets depending upon the asset allocation mix. Endowment plans generate returns which are in the range of 4% to 6%. On maturity Insurance companies allow the investor to withdraw one third of the accumulated amount which is tax free and the balance amount is compulsorily utilised to provide life time annuity according to the prevailing annuity rate. The pension received is taxable in the hands of an investor. LIC is the biggest annuity provider in the country.
The retirement planning is always done with a long term view in mind. A product can be considered ideal for retirement planning which helps in generating tax free return, beats inflation in long term, provide much required liquidity, have minimum charges and also suits an investor risk profile. Out of all the available options, mutual funds pension plans are best in the lot. They generate better returns and also have better liquidity than any other pension product.
However, planning retirement with the help of an advisor is recommended as different people have different risk profile and lifestyle to support savings towards this goal.
Ayush Bhargava is a CFPCM and specializes in preparing personal finance roadmap for the young families. He is associated with www.gettingyourich.com, a financial planning firm.