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Everyone wants a secured retirement as retiring without adequate financial support can be a rather painful experience. In your whole life after setting aside money for different goals such as children's education, their marriage and so on, the most important thing you should consider is planning and investing for your retirement and pension. Doing this early in your career will ensure a higher sum at retirement.
Here we detail the key avenues where you can invest for your retirement and look at aspects such as returns, tax issues, cost structure and liquidity while evaluating individual products. We discuss the retirement plans of life insurance companies, the NPS (New pension scheme), mutual fund retirement funds and the more common PPF and EPF schemes.
Insurance Pension Plans
Life insurance companies, led by state behemoth LIC, and private players such as HDFC Life, Birla Sun Life, Bajaj Allianz and Aviva offer what are commonly called annuity products. These are also called unit linked pension products or ULIP.
Broadly, there are two types of ULIPs - single premium and regular premium annuities. A single premium policy is one where you pay a lump sum that you may have accumulated over the years and purchase an immediate annuity (a stream of monthly income over several years). For this, most insurance companies set a minimum 40-year age limit. This means that you pay a lump sum this month and start receiving a pension from the very next. The other more long-term oriented scheme is the regular premium policy.
PPF and EPF
By far, the simplest of retirement products are the public provident fund (PPF) and the employee provident fund, EPF. A PPF account can be opened with post offices or select national banks such as SBI. It has a 15-year lock-in, with an option to increase it by two blocks of five years each, which effectively means a 25-year horizon. Recently, the ceiling for annual investment in this product has been raised from Rs 70,000 to Rs 1 lakh.
The interest rate has also been increased from 8 per cent to 8.6 per cent.
Retirement Mutual Funds
UTI Retirement Benefit Pension Fund and Templeton India Pension Plan are the two specialised retirement funds that have been in existence for over a decade. More recently Tata Mutual too has launched a retirement savings plan.
These are funds that invest a major (around 60 per cent) portion of their portfolio in debt instruments and the rest in equity. Investors basically contribute sums periodically like a regular SIP and after the age of 58 or 60 years, it is converted into an annuity with an assured pension with the corpus accumulated.
While the UTI and Templeton funds enjoy tax benefits under section 80 C, Tata Mutual's scheme doesn't. However, with changes likely in the DTC, the tax exemption even for UTI and Templeton isn't a certainty. More importantly, both these funds have lagged their benchmark as well as category average over five-year timeframes.
National Pension Scheme
National Pension Scheme is Government backed pension scheme and details of which are available at PFRDA. Best points about this scheme are, your amount is locked till your retirement which ultimately forces you to wait till retirement and second point is its lowest charges (0.0009% to 0.25%). But at the same time few disadvantages of this plan are, maximum cap of equity restricted to 50% only which ultimately restrict your equity exposure and will impact the return part, mandatory buying of retirement product will be little bit unfair kind of idea, no control over your portfolio, retirement benefit you receive is taxable income as usual to other retirement products.