Where to invest for retirement?

ICICI Investing Scheme

Post Office Schemes

Pension Plans

WHOEVER said variety is good for consumers had no marketing sense.

An experiment with jams showed that when a customer had six options to choose from, the conversions were much higher than when he had 24 options to choose from.

With so many options, the consumer gets paralyzed with the burden of selection. Is this what is happening to retirement planning? Is that the reason why sensible people are procrastinating?

There are various reasons why retirement planning has become imperative today: longer life span, increased medical costs, inflation etc. Even so, there are just a few takers.

Why don't you look at the options available?

Equity: Traditionally discouraged as a retirement planning tool, it could give your investments a boost if you start early.

Insurance: This one is popularly used for retirement planning. Experts say it should only be used as a risk cover, and not as an investment tool.

Provident Fund and Public Provident Fund: The all-time favorite option. Our grandfathers believed in these low-risk schemes implicitly.

Fixed deposits: Safe and secure, but may cower under inflation with their low returns.

Mutual funds: Preferable one, this. There are the professionals whose experience and expertise will come handy.

Property: Totally ever-appreciating asset in the long run, especially with the real estate boom. Small catch: the liquidity concern. Not everyone has money on hand to invest

Option 1. Pension plans

They are ideal for retirement because they provide a cushion of debt in your portfolio and help you diversify. The advantages:

i. If you invest up to Rs 1 lakh in these plans, you are eligible for a deduction from your taxable income. What this means is, your taxable income comes down by Rs 1 lakh, and you stand to pay lesser tax.

ii. After you retire, you can withdraw one-third of the fund balance as a lump sum, tax free. The rest of your money will be invested in an annuity plan. You could choose to have a monthly or quarterly income from it. (Note: annuity is taxable.)

Option 2: Unit Linked Pension Plans

These are good if you don't mind a little risk and policy monitoring. Here are some ways you could go about them:

i. You could invest your funds in aggressive equity schemes.

ii. You could switch funds across schemes (from debt to equity and vice versa), as and when required. Switches are exempt from capital gains tax and transaction fees (some companies do charge though).

iii. Unlike mutual fund investments, you could stay away from entry loads when you re-enter equity funds in your ULIPs.

These are just some of the options. Debt products, bonds, debentures, National Savings Certificates are also available depending on how you want to invest your money and how much risk you are willing to take.

Are the choices overwhelming? Here's a tip: a mix of these could give you the best returns

Clever retirement tips

Indian Middle Class, especially people around the age group of 45 are getting into a pension trap. It was explained time and again that we should start saving for pension/retirement plans, when we are young. So that the power of compounding will be on our side and even a small savings in the earlier years will help us more in the later years. But still in our endeavor to live a better today, we normally ignore the need for a safe tomorrow. 

Here, we are listing some of the basic requirements one should consider when any one is planning for a pension plan. These are basic essentials, which should definitely be considered before finalizing, and then only a safe and secure retirement period could be envisaged. 

Ø     Be focused. Never try to look at additional/ancillary benefits. Each of the additional benefits does cost and reduces the maturity benefit. The intention of any pension plan should always be to generate maximum retirement corpus only. 

Ø     There should be a regular and committed outflow towards the goal till the retirement age and there should not be any commitment after the chosen retirement age. 

Ø     Generally only the inflation alone is counted for the requirement of funds post-retirement and not the standard of living changes – in fact in the last few years, standard of living changes constitute the major increase in the expenditure pattern rather than inflation.   

Ø     Also inflation is generally counted only up to the retirement age and not afterwards – whereas the inflation does continue till one survives. 

Because of the above two factors, the following investment options to be

followed: 

1)   At the time of calculating the returns, try and ensure the lower level of returns and thus create a cushion of the differential higher returns.     

2)   Try to ensure that in the initial years of retirement, the income generated by the corpus will be adequate to meet the living expenses and subsequently when it is not sufficient, one can start encroaching into the principal, which will sustain rest of the life. 

Ø    The entire corpus generated should be available for an immediate annuity option from the retirement age. 

Ø     There should not be any flexibility or liquidity options for the pension plan. The entire corpus should predominantly be committed for the annuity option and there should not be any withdrawal facility during the contribution (wealth creation) period – as it is only a very limited portion of individual’s investments are channeled for the pension option and hence we should not seek any liquidity option in these funds also. 

Ø     There should not be any commitment at this stage about both the annuity options as well as service providers for the distribution of annuity – Once the pension options open up in India, we might see a variety of more suitable options available and if any one commits at this stage it will not be appropriate. 

Ø     When we look into unit-linked plans (they are really the best for long-term), we should also look into the overall cost structure, which impairs the total return in the long-term as well as the performance of the fund and the group as such. 

Ø     When base expenses are counted, we should also include all the expenses currently reimbursed by the company and incremental expenses to be incurred both for medical and traveling. 

Ø       Last but not least, the tax benefit in any pension plans are clearly defined – the accumulated corpus will be tax-free and only the annuities at the time of receipt are taxed. We will have the flexibility to frame the annuity cycle at the time retirement and the same can be worked out at the time of maturity depending upon then prevailing tax rates. Making any guesses about the tax structure to be prevalent that time will be really hazardous.

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