When you save for a pension, you should regularly review how
it’s invested. And as you get older, you should probably change your
investment strategy to reduce risk as retirement draws closer.
Do you need to make investment choices?
Personal, stakeholder and defined contribution schemes
If you have a personal or stakeholder pension or money in a workplace defined contribution scheme, you’ll normally have to decide where your pension money is invested.
Pension providers often try to make your decision as simple as possible.
They usually offer a range of funds, so you can choose from several
broad investment strategies that are suitable for most people.
If you don’t make an active choice yourself, the pension provider
will invest your pension in a ‘default’ fund that’s designed to suit as
broad a range of people as possible.
Defined benefit schemes
If you’re a member of a defined benefit scheme in your workplace, you’re not responsible for the investment decisions.
Your scheme promises your retirement income, so it’s your employer
who takes the investment decisions and risks needed to reach that
target.
But you might still need to make pension investment decisions at some point.
For example, if you decide to boost your pension savings by making additional contributions to a defined contribution scheme.
What are the main investment options?
Most defined contribution pension plans offer a range of investment
funds that are designed to invest your money in different ways over the
years until your retirement.
You need to choose a fund (or funds) that offers the broad investment strategy you want.
All the details – such as the choice of the specific assets that the
fund invests in – are handled by the fund’s investment experts.
Investment funds usually invest in several key asset categories, including shares, bonds and cash.
You’ll probably be offered a choice of funds that:
- Specialise in specific assets – eg a fund focusing on shares in European companies
- Invest in a mix of different assets – eg a fund investing in both global shares and government bonds
Most people choose to invest their pension in the second type of fund, because spreading (‘diversifying’) your investments is a good way of managing risk.
You could also diversify your investments in this way yourself, by
dividing your money between a range of specialised funds. But this
requires more time and financial knowledge.
Lifestyle funds
Over the long term, shares have tended to perform better than bonds or cash, which are lower-risk investments.
Many pension plans offer a ‘lifestyle’ fund, which automatically
shifts the balance of your investments towards less risky assets (such
as bonds and cash) as you near retirement.
This shift will be handled by the fund’s investment experts. ‘Target date’ funds work in a similar way.
Self-investment
If you have a large pension pot, you can take greater control of your pension and access a wider range of assets by using a SIPP (self-invested personal pension).
This is only suitable for experienced investors who are comfortable with taking investment decisions.
Key things to consider when choosing
There’s no need to over-complicate your investment decisions.
Keep these things in mind and you should be off to a good start.
Invest for the long-term
Don’t shy away from investing in shares.
You want your investments to grow, and that’s difficult to achieve if
you only choose lower-risk investments such as cash or bonds.
Shares have historically performed better than cash or bonds over the
longer term, but be aware that there are no guarantees they’ll always
do that.
Diversify
Don’t put all your eggs in one basket. If you choose a basic managed
fund this should be well diversified already, so you might not need to
spread your money further.
But if you choose highly specialised funds, you’ll probably want to pick a few different ones to spread your risk.
Fees and charges
Check how much the different funds on offer charge – only choose funds that have competitive charges.
Review your investment choices every year
You might not have to make any changes, but you should check your
investment choices every year to make sure you’re still comfortable with
the level of risk and that charges haven’t gone up.
This is even more important as you get closer to retirement.
At this point, you’ll want to make sure the strategy matches what you intend to do.
For example:
- If you want to use your pension pot to buy a guaranteed income
from an annuity, you might want to move to lower-risk investments to
help protect the fund you’ve built up from any shocks in stock market
performance.
- If you want to use your pension pot for a flexible income with
income drawdown, you might want to set a strategy to meet your ongoing
long-term investment needs.
Retirement Planning in India is not an easy job at all. Rising inflation numbers, slowing economy growth, love for Gold and
of course too many financial products do not make life easy for any
individual planning for retirement. Mis-selling of financial products by
banks and other financial institutions has only doubled the customer’s
confusion.
In this article, we will be talking about different retirement products
available for investment in India. Retirement has two phases –
Accumulation and Distribution. Accumulation phase is the period where
you accumulate the amount required for your needs post retirement.
Distribution phase is where the accumulated corpus is distributed well
to suffice the post retirement needs. Let us look into financial
products for investment pre-retirement and post retirement.
Pre-Retirement Investment Products
1) NPS: New Pension Scheme or NPS is a perfect
retirement product open to all individuals across the country. NPS has
delivered annualized returns of around 10% in the last 4 years. This
scheme is mandatory for government employees. The fact that fund
managers of NPS scheme can also take exposure to equity and equity
related instruments is also a positive for the scheme in the long run.
NPS also provides tax benefit in the form of deduction under section
80C. Remember that it is mandatory to purchase annuity worth 40% of the
corpus accumulated through NPS at the time of retirement. You can use
these Pension Calculators from Govt. of India to calculate basic
pension, family pension and pension commuted.
2) EPF: Employee’s Provident Fund or EPF is the most
popular retirement saving instrument in India. Though it was introduced
as a retirement product, not many see it so. The current rate of return
from EPF is fixed at 8.5% p.a. EPF offers deduction up to 1 lakh limit
under section 80C; interest from EPF is tax free and withdrawal is also
tax free if there is continuous service of 5 years.
Unlike NPS, EPF does not have any restrictions such as purchasing
annuity. However, it is advisable to stay invested in this scheme by
opting for EPF transfer whenever there is change of job. This would
ensure that you reap the benefits of guaranteed returns along with power
of compounding.
3) Equities: No matter how many financial instruments
you pick, none of them can match the returns provided by equity related
instruments such as Stocks and Mutual Funds. While investing in
these instruments, make sure that you pick products for the long term
i.e at least 10 years or more and your emotions are under control in
this period.
This doesn’t mean you have to stick to the product evening though it is
not performing well. Review the products every year or switch to better
products only is something has gone wrong fundamentally. Mutual funds
also give you an option of monthly SIP, where you can invest in a
disciplined manner for your retirement. Equity related products are also
tax free after 1 year of investment.
4) ETF: Exchange traded funds, popularly known as ETF’s
are also a good option for accumulating corpus for retirement. In
India, ETF can be done through Index or Gold. Index ETF tracks the index and Gold ETF invests in Gold. You can purchase units of ETF by purchasing Gold units every month. You would thus benefit from cost averaging rather than investing in bulk and entail the risk of timing the markets.
5) Bonds: Bond is a type of loan taken from you by a
company or government and giving you some interest for the loan. You
would have seen a flurry of bonds these days such as IIFCL tax free
bonds, HUDCO bonds, inflation bonds,
etc. Many of these bonds are for 10 and 15 year durations. Some of
these bonds offer interest rates in excess of 10-12% p.a. Do check the
ratings of these bonds before investing in them.
Post-Retirement Investment Products
1) Monthly Income Schemes: Post retirement, you would
require schemes which provide regular income for you. Such schemes are
popularly known as Monthly Income Schemes (MIS). Various mutual funds
provide these in the form of funds. Post office also provides MIS.
You usually invest a lump sum and the corpus is invested in various
instruments to provide you monthly income. Post office offers interest
rate of 8.4% p.a and the maturity period would be 5 years.
2) SCSS: Senior citizens saving scheme (SCSS) is just
the kind of retirement product you would need post retirement. This is
the safest investment option for senior citizens. You can gain an
interest of 9.2% p.a with a maturity period of 5 years. The account can
be opened in post office or any nationalized banks.
3) Reverse Mortgage: Reverse mortgage is a wonderful
option given to senior citizens for a regular source of income. You can
pledge your house with a bank to receive income from the bank regularly
for a set period of time. The amount received will depend on the
valuation of the house and the term opted. A recent ruling on this
scheme has made the income received from house property under this
scheme totally tax free.
4) Pension Plans: Pension plans are provided by
insurance companies as well as mutual funds. They would invest a lump
sum amount and provide you monthly income just as in the case of SCSS or
MIS. Charges from insurance company provided pension or annuity plans
are usually higher than mutual fund provided ones.
5) Liquid Funds and FD’s: The investment options given
above do not give you proper liquidity. As senior citizens, you might
need to put some amount aside as an emergency. To make sure that this
amount also earns decent returns, you can opt for liquid funds or fixed
deposits of varying tenures. Liquid funds are also tax efficient.
Conclusion
These are the retirement products available for investment in our
country. Ideal time to start saving for retirement would be 1-2 years
after you get your first job. If you have not started yet, it is time to
start now.
Investment Options for Senior Citizens
Senior Citizens Savings Scheme
Eligibility – Persons equal or over the age
of 60 can invest. Voluntary retirees can invest once they are 55 years
old. One can open an additional account as a joint account with the
spouse.
Investment Limit – Maximum of Rs. 15,00,000 irrespective of number of accounts.
Benefits – Current rate of interest is
8.5%. It is market linked based on 5-year government bond yield.
Interest is paid quarterly. The interest rate is locked once the
investment is done. Low-risk product. Premature closing of account is
possible. Investment can be treated as the deduction under Section 80C.
Limitations – Interest rate might decline. Interest is taxable.
Senior Citizens Pension Plan (Varistha Pension Bima Yojana)
It is an annuity plan wherein payouts are made periodically to the policy holder.
Eligibility –Anyone who is 60 years or older can invest.
Investment Limits – Minimum – Rs. 63,960
and maximum of Rs. 6,39,610. The annuity is slightly higher if the
frequency of payouts is monthly or quarterly.
Benefits – Returns are around 8%. Premium
amount is refunded after 15 years, on death or diagnosis of critical
illness/ disease. One can take a 75% loan against it after three years
if purchase. Monthly pay-outs are possible. Premature withdrawal is
possible though one has to pay a penalty. Amount received at maturity
can be reinvested in POMIS.
Limitations – It is relatively illiquid compared to other options. The pension is taxable.
There are other pension plans available offered by private players.
The annuity rate is lower but there is no upper limit on how much one
can pay for an annuity. They are available for different durations and
most of them do not allow premature surrender.
Post Office Monthly Income Scheme (POMIS)
Eligibility –Anyone who is 10 years or older can invest.
Investment Limits – Minimum – Rs. 1500 and
maximum of Rs. 4,50,000 in the case of a single account holder and Rs.
9,00,000 in the case of a joint account.
Benefits – Fixed monthly interest rate –
7.7%. Monthly pay-outs are possible. Premature withdrawal is possible
though one has to pay a penalty. The amount received at maturity can be
reinvested in POMIS.
Limitations – Investment is not tax deductible. Interest earned is taxable. NRIs cannot invest in this product.
Annuity
You should check this post to understand annuities – LIC Jeevan Akshay Review There’s specific reason we have not covered annuities in the best investment options for senior citizens in India – you may get a hint in Jeevan Akshay post.
Bank and Company Deposits
Bank FDs are the oldest and popular form of saving among senior
citizens. One can invest money in company deposits for interest returns.
The rate of interest is usually higher than Bank FD interest rates.
Eligibility –Banks are allowed to set the
age limit for opening accounts. Most banks allow people, 10 years or
older to open a sole account and a joint account if younger than 10
years.
Investment Limits – It ranges from Rs. 5000 to more than a crore depending on the bank/ company.
Benefits – Most banks offer interest rate
up to 0.5% higher than normal fixed deposit rates to senior citizens. It
ranges from 4%-8% for banks. Company deposits offer 8%-8.90%. Income is
stable. Some corporate deposits offer higher returns to senior
citizens.
(Pay a penalty. The amount received at maturity can be reinvested in POMIS.)
Limitations – Interest rates are going
down. FDs will not be able to beat inflation. Company FDs carry higher
risk. It is better to invest in companies rated AA and above. Interest
earned is fully taxable based on the tax slab you fall under.
Mutual Funds
There are no specific mutual fund
investment schemes for senior citizens. Depending on the risk appetite,
senior citizens can invest some amount in Mutual funds. They can choose
mutual funds that have a lower risk. Debt funds, liquid funds etc. that
invest in commercial paper, bonds, government securities etc. Can also
think of adding 20-30% of asset exposure to equity mutual funds based on
risk profile.
Benefits – Well performing funds give
returns that can beat inflation. They are managed by professionals so
there is better management and less chance of losses. They provide
capital appreciation. Monthly Income Plans give regular income too. One
can withdraw money from Liquid funds very easily.
Limitations – Subject to market risks. Long term
gains of Nonequity funds are subject to taxation of 20% with
indexation. Short term gains (holding period < 3 years) are subject
to the tax rate as per your tax slab.
Benefits Available for Senior Citizens
Investment Options for Senior Citizens in India are limited in India –
other benifits are even lesser. Here are some of the benefits that you
should take advantage of if you are a senior citizen –
- Tax benefits – There are tax exemptions and tax benefits provided to senior citizens.
– Tax exemption limit is Rs. 3,00,000 for people who are 60 years -79
years and Rs. 5,00,000 for people 80 years and older (super senior
citizens).
– Under Section 80D which is for payment of premium on medical insurance, there is a deduction of Rs. 30,000 for senior citizens which is Rs. 5,000 more than that for non-senior citizens.
– Deduction of Rs. 60,000 is available to senior citizens and
Rs.80,000 for super senior citizens under Section 80DDB unlike the usual
Rs. 40,000 for others.
– Senior citizens can file form 15H so that TDS is not applicable for interest earned on FDs.
– Senior citizens who do not have business income are exempted from paying advance tax.
- Tickets – There are special offers for
senior citizens when it comes to rail and air tickets. There is 40%
concession in fares for men above 60 years and 50% concession for women
above 58 years. People above 45 years will be allocated lower berths.
Wheelchairs and separate counters in Passenger Reservation Areas are
provided. There are special provisions for air travel as well. Air India
provides a discount of 50% on economy class fare for travel within
India to people who are 63 years or older at the time of boarding the
flight. Currently Spice Jet is offering discount of 15% on base fare
(until September 30, 2016) to citizens 60 years and older. This is valid
for domestic travel.
- Other Facilities – Senior citizens need not fix an appointment for
applying for a passport. They can walk-in and will be given preference
in terms of waiting time. They are given discount in MTNL phone bills
and priority hearing in high court. Some hospitals give discount on
medical treatment for them.
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