Retirement Funds: Investing Wisely For Indians' Golden Years

Retirement planning is an important aspect of financial planning. It involves investing in suitable schemes to ensure financial security and stability in the absence of a regular income stream. There are various investment options available in India to help individuals build a retirement corpus. These options include pension plans, the National Pension Scheme (NPS), Unit Linked Insurance Plans (ULIPs), Systematic Investment Plans (SIPs), health insurance plans, Public Provident Fund (PPF), bank fixed deposits, Senior Citizen Saving Scheme (SCSS), mutual funds, and tax-free bonds. Each of these options offers different benefits in terms of returns, tax advantages, and investment horizons. It is important for individuals to carefully consider their financial goals, risk appetite, and investment timeframe when choosing the right retirement investment plans.

Pension plans

• ICICI Pru Signature Pension: This plan offers market-linked returns and lives coverage. It also provides tax-free commutation of up to 60% of the vesting benefit.
• Tata AIA Fortune Maxima: This plan offers life insurance cover, market-linked returns, and the potential for higher returns than traditional pension plans.
• HDFC Life Click 2 Wealth: A participating unit-linked pension plan with guaranteed life cover, loyalty additions, and a special addition of 1% of the annualized premium for the first five years.
• ICICI Pru Guaranteed Pension Plan: This plan provides guaranteed income for life, with the option to cover either a single life or joint life. It also offers flexible payout options.
• Bajaj Allianz Life LongLife Goal: A unit-linked pension plan with guaranteed life cover, annuity payout, and loyalty additions. It also offers flexibility in payout options and life insurance coverage until the age of 99.
• HDFC Life Smart Pension Plan: This plan offers automatic asset rebalancing, systematic transfer strategies, and life insurance cover. It helps to build a retirement corpus and provides flexibility in vesting date and premium payment terms.
• HDFC Life Smart Pension Plus: This plan offers guaranteed annuity income for life and flexible payout options. It caters to both single and joint life and offers immediate and deferred annuity options.

National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-sponsored pension scheme that was launched in January 2004 for government employees. In 2009, the scheme was opened to all Indian citizens between the ages of 18 and 70. The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government.

Through the NPS, subscribers can regularly contribute a defined amount to a pension account during their working life. Upon retirement, subscribers can withdraw a portion of the accumulated funds as a lump sum, and the remaining amount is received as a monthly pension. The NPS is portable across jobs and locations, and subscribers can also choose their own investment options and fund managers.

Benefits of NPS

The NPS offers tax benefits under Section 80C and Section 80CCD of the Income Tax Act, 1961. It is one of the lowest-cost pension schemes globally and provides market-linked returns based on the investment choices made by the subscriber. The NPS also allows subscribers to access their accounts online and change their scheme or fund manager if they are unhappy with the performance.

Types of NPS accounts

The NPS offers two types of accounts: Tier I and Tier II. Tier I is the default pension account with restrictions on withdrawals, while Tier II is a voluntary savings account with no tax benefits but no withdrawal restrictions.

Eligibility for NPS

To be eligible for the NPS, individuals must be Indian citizens (resident or non-resident) or Non-Resident Indians (NRIs) between the ages of 18 and 70. They must also comply with the Know Your Customer (KYC) norms and be legally competent to execute a contract per the Indian Contract Act.

Unit Linked Insurance Plans (ULIP)

Unit Linked Insurance Plans (ULIPs) are a type of life insurance plan that offers the dual benefit of life insurance and investment. ULIPs are often considered the best investment options for retirement, especially if you start early. They are savings and life cover plans. A part of the premium paid is invested in funds of your choice, and the other goes towards life cover.

ULIPs feature the flexibility of tailor-made life cover as per individual risk appetite. There are lower mortality charges for early investors, and part-withdrawals are allowed for immediate fund requirements. You can also expect tax benefits on premiums paid under Section 80C.

ULIPs are highly transparent investment instruments. Policyholders get regular performance updates on their investments, with details on fund Net Asset Value (NAV) and associated charges. This paves the way for informed decision-making.

There is a lock-in period on ULIP investments; policyholders cannot surrender or withdraw their funds for a minimum period specified. The lock-in period aids long-term investment and helps in wealth creation over time.

ULIPs offer investors the opportunity to invest towards a life insurance policy and a mutual fund with a single plan. The amount which you invest in a ULIP is referred to as premiums. This amount is divided into two parts, one of which is invested towards debt, equity or hybrid mutual funds as per the market scenario. The other part is used to buy life coverage like any life insurance policy.

The investment part of a ULIP works similarly to mutual funds. It is invested into equities, debt or a combination of both assets; you get the option to choose a plan or switch between plans. Like mutual funds, you are assigned units in proportion to your investment. Each unit has a daily NAV (Net Asset Value) which reflects the value of the underlying assets.

ULIPs are unique in that they offer flexibility to investors, who may adjust their fund preferences throughout the duration of their investment. For example, they can shuttle between stock funds, bond funds, and diversified funds depending on their investment needs.

ULIPs are intended for long-term wealth creation. They may allow for partial withdrawals and often come with higher fees and administration charges. They experience the same market exposure as any other investment and may face a lock-in period where funds can't be touched.

Public Provident Fund (PPF)

Features of PPF

• PPF accounts have a minimum tenure of 15 years, which can be extended in blocks of 5 years.
• The minimum investment amount is Rs. 500, while the maximum is Rs. 1.5 lakh per financial year.
• Investments can be made in a lump sum or in up to 12 instalments per year.
• Deposits must be made at least once a year for 15 years to keep the account active.
• The interest rate for 2024 is 7.1% p.a., compounded annually.
• Partial withdrawals are permitted from the 5th financial year onwards, with certain conditions.
• Loans against PPF are permitted after the completion of 3 years, with a maximum loan amount of 25% of the balance.

Eligibility and Opening a PPF Account

• Any Indian citizen, including minors, can invest in PPF.
• NRIs are not eligible to open new PPF accounts, but they can continue contributing to existing accounts until maturity.
• PPF accounts can be opened with authorised banks or post offices by submitting the required documents, including KYC documents, address proof, and a nominee declaration form.

Tax Benefits of PPF

• Investments in PPF are eligible for tax benefits under Section 80C of the Income Tax Act, 1961.
• The interest earned and the returns on PPF are tax-free.
• The entire amount redeemed from a PPF account upon maturity, including the accrued interest, is not subject to taxation.

PPF is a popular investment option for retirement planning due to its stability, tax benefits, and guaranteed returns. It is important to note that PPF has a long lock-in period and moderate interest rates compared to other investment options.

Senior Citizen's Saving Scheme (SCSS)

The Senior Citizen Savings Scheme (SCSS) is a government-backed retirement benefits programme for senior citizens resident in India. Individuals can invest a lump sum in the scheme, either individually or jointly, and receive regular income along with tax benefits. The scheme is available to those over 60 years of age, as well as retired civilian employees above 55 years and retired defence employees above 50 years, with the condition that the investment is made within one month of receiving retirement benefits.

The SCSS account can be opened at a post office or an authorised bank, with a minimum deposit of Rs. 1,000 and a maximum of Rs. 30 lakh. The maturity period is 5 years, which can be extended for another 3 years. The interest rate is currently 8.2% per annum, paid quarterly. The scheme offers tax benefits under Section 80C of the Income Tax Act, 1961, with deductions on investments up to Rs. 1.5 lakh.

Premature withdrawals are permitted, but a penalty will be charged, which is 1.5% of the principal amount if the account is closed after one year, and 1% if closed after two years. The account can be transferred from a post office to a bank, and vice versa.

Frequently asked questions