At a certain point in life we do get
jittery about the years we spend in retirement. For most people, that point comes
somewhere in forties. For some of us the realization hits us in our fifties. We
then hit the panic button.
All of us realize that we need a good
corpus in retirement. But most of us underestimate how much we need.
And there comes along an insurance
agent, who converts the butterflies in our stomach to cash in bank – for him –
by selling pension plans as the panacea for a well-funded retirement!
Pension plans are directly connected
to retirement. It seems natural to plan for retirement through pension plans.
That seeming connection has been wonderfully exploited by insurance companies
to sell huge pension policies to those who are in the panic mode. Holding one’s
head high in retirement & living with dignity is a theme that has gone down
well with this crowd.
People feel safe after doing these
pension policies and heave a sigh of relief after they have half a dozen policy
documents in their hands. Have they really done the right thing? One needs to
know a bit more about pension plans…
Knowing about pension plans
Pension plans have an accumulation
phase when one needs to contribute regularly towards building the corpus. Around
the time one retires, the corpus accumulated would be used to pay a regular
income called Annuity. The annuity is typically the interest income being
distributed back to the policy holder. But the distribution is low – just 5-6%
on an average. In some cases, it goes to 7% or more.
The problem with a pension plan is
that in the accumulation phase, the corpus grows only by 4-6%, ensuring that
the final corpus is rather puny. This is what happens in the traditional
pension policies.
There are unit linked pension policies
where the corpus growth can be faster, but is subject to the vagaries of the
market. The policy holder is going to bear the market risk here. Potentially,
these policies accumulate to a much bigger corpus and hence the annuities can
be better.
Also, the pension policy premiums are
eligible for tax deductions under Section 80C, which is a talking point and a
prime selling point for the agents.
Sounds fine to you? Wait till you hear
about the taxation…
The taxing issue
Unlike all other insurance products,
pension products accruals are not tax free. This is a vexing problem regarding
pension products. Due to the income tax, the actual returns will be very low
indeed, as the gross returns itself would be 5-6%. After tax, it will be even lower
and will fare poorly in comparison to the other investment options.
There have been representations on
this to the government and it is being considered. But, when it will see the
light of the day is an open question. Hence, the current situation is that the
pension income is taxable.
Now what…
If pension plans don’t appear that
great any longer and you are again panicking, help is on the way. Stay with me…
The fundamental thing is that you need
not plan retirement through pension policies. In fact, it is quite an
inefficient way of planning for retirement – so much so that, you are sure to
be underfunded if the main or the only way by which retirement planning is done
is through pension plans.
 |
Employee PF & other retiral
benefits are not to be used and should be kept aside exclusively for use in
retirement.
Sustained income can be setup using
tax free bonds and systematic withdrawal from debt mutual fund schemes. These
two are very tax efficient. Systematic withdrawal from debt funds is completely
flexible & lends itself to increased or decreased withdrawals, in times to
come.
There are other traditional investment
options like bank FDs, Post Office MIS, Senior Citizen Savings Scheme etc.,
which would also offer interest income & may still work reasonably well for
those in the lower tax brackets or nil tax bracket.
Some people also depend on rental
income. But administering a property in retirement is not the best way to have
a peaceful retirement – with all the headaches surrounding it. Also, the rental
yield in India is about 2%, on an average. A person in retirement is hence well
advised to cash out the property and invest in a financial asset from which to
earn income in a hassle free manner and at a much higher level.
We can hold our head high in
retirement only if we plan well. Else, it will be a retirement where we need to
cut corners, depend on others & generally feel miserable. We don’t want to
be there, do we?
Article is published on Moneycontrol.com on 29th Jul-15
No comments:
Post a Comment