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How You Can Save for Your Retirement: A Short Guide to Retirement Planning

Editorial Intern, TRANSFIN.
Oct 8, 2020 12:40 PM 5 min read

Retirement sounds like a dreamy idea…the notion of "sit back, relax and never go back to work"...

If only it was that simple!

The biggest challenge with post-retirement life is finding a steady source of income. This is especially true for those who did not invest in some form of savings scheme when they did have a regular inflow of money.

To ease such burdens, retirement savings schemes are a common investment option. They are incremental, spread over a long period, and serve as a reservoir of funds post-retirement.


What are Retirement Savings Schemes and How do they Work?

Retirement saving schemes, also known as pension plans or pension schemes, are investment plans to ensure financial security when professional sources of income are no longer available. These schemes have a lock-in period of three to 15 years where regular premiums are paid towards the fund.

These schemes are typically annuity plans lasting for the lifetime of the subscriber. When a certain age is reached, called the “vesting age”, the savings become available for use or withdrawal.

There are two variants of such schemes, namely:

  1. deferred annuities, where the subscriber makes regular payment of premiums during his professional life (the “accumulation phase”) and starts receiving money once he retires (that is, at the start of the “decumulation phase” or the vesting age), and
  2. immediate annuities, where the subscriber starts receiving money immediately once a lump sum payment has been made in the fund.

A deferred annuity naturally gives more time to the money in the fund to grow vs an immediate annuity.

Pension plans ensure that you passively invest your savings into the financial markets, that is, equity, debt, index and mutual funds during your professional life through fund managers, granting you a reliable income once you retire.

When these plans mature, the subscriber is entitled to the savings benefit accrued over a period in addition to returns from their ‘accrued’ capital, as a result of being deployed in various investment instruments all this time. That way they are different from an insurance product where there is no investment benefit and the only payment received is by way of a claim.



What Types of Retirement Planning Options are Available?

Government Options

Retirement planning with savings schemes can be either government-administered or by private financial institutions. Let’s focus on the government-administered schemes first. These mainly operate like deferred annuities.

Provident funds are a common type of secure savings scheme. The Employee Provident Fund (EPF) scheme allows employers and employees to contribute funds jointly on monthly basis. Employees are required to contribute 12% of their monthly salaries towards the EPF. These funds can be accessed only after the retirement of the employee. The advantage with EPF is that contributions are deducted directly from salaries making the practice of savings more methodical (and practical as well considering there’s no inertia to the actual decision making).

Linked to an employee’s EPF account is their Voluntary Provident Fund (VPF) account. This scheme is similar to EPF except that employees can choose how much they wish to contribute above the 12% threshold. Since the VPF and EPF accounts are attached, if employees wish to contribute to VPF, they must first make contributions to EPF.

Public Provident Funds (PPF) is another form of a government-administered pension fund where individuals can opt to invest money either through post offices or banks. These funds typically come with a longer lock-in period of 15 years, compared to private savings schemes which have between 3 to 10 years.  The upside – these funds are considered highly secure forms of investment due to fixed returns.

National Pension System (NPS) is a voluntary contributions scheme where funds are pooled into a pension account during professional employment. Unlike provident funds, however, returns on NPS are market-linked. Subscribers of these accounts can later avail funds as an annuity upon retirement or as a lumpsum withdrawal from the corpus. This scheme pays a monthly income to retirees who invest in it.

Government schemes can also be non-annuity based, such as the Senior Citizens Savings Scheme (SCSS) and Post Office Monthly Income Scheme (POMIS). These are low-risk schemes backed by the government where subscribers get a regular monthly income when they park their money in the scheme. They behave more like fixed deposits and have a shorter maturity of 5-8 years compared to provident funds. They don’t require mandatory contributions during one’s professional employment.

Private Options

Private savings schemes are typically under the aegis of private financial institutions.

These schemes vary greatly in terms of sum assured and vesting age depending on customer needs. Since they are not mandated by the government, they are more flexible.

Unit Linked Insurance Plans (ULIPs) are a dual investment and insurance tool. An insurance company invests part of the investment in life insurance, while the rest of the amount goes towards equity- or debt-oriented funds. The downside is that ULIPs are not meant to be annuity tools, i.e. they only last so long as the maturity period and not for the entire lifetime of the subscriber. Secondly, they’re usually market linked with no guaranteed pay-out or downside protection – hence professionals and retirees should assess their terms granularly before taking any exposure.

Individuals can also accumulate savings through mutual funds. Equity Linked Savings Scheme (ELSS) is a form of mutual fund investment linked to the equity markets. With the least lock-in period of 3 years, these instruments are associated with higher risks but yield higher compounding returns. For investors looking to minimise risks within private investment schemes, multi-cap mutual funds are an option.


A Short Guide to Retirement Planning


What Differentiates Savings Schemes?

Retirement savings schemes differ based on subscribers’ needs and risk-averse nature.

Those with a view of aggregating a larger corpus over time typically invest in schemes like NPS and ELSS as it comes with higher returns linked to the markets. Savings schemes that come with an attachment to the equity markets also carry a higher risk element.

Low-risk instruments that guarantee a steady stream of payments, such as EPF and PPF, are common amongst employees of the government and Multinational Corporations (MNCs).

An advantage that NLP and ULIP share is that they also allow for partial withdrawals on the corpus, particularly in the case of the sudden demise of the subscriber.

All savings schemes are eligible for different levels of tax exemptions under Sections 80C and 10D of Income Tax Act, 1961 including Fixed Deposits, PPFs and ULIPs. Some schemes have lesser or conditional exemptions, while others don’t. The key is to keep an eye out for details regarding interest rates, lock-in periods, the volatility of potential investment funds and corpus withdrawal clauses, and match these with one’s needs.


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