We all know the importance of saving enough for our post-retirement lives. However, many of us delay, sometimes till it is too late.
Procrastination is a big reason for this. Another, people delay saving for their retirement is the daunting task of selecting the right product or products to invest in.
There are six investment products solely meant to take care of one's post-retirement needs. Each of these products have their own unique features that you should be aware of. They come with certain tax benefits that come along either at the investing age or/and on maturity. For some, the returns will taxable. Some may have rigid lock-ins. Others just may not be suitable for your individual needs. So, before choosing, know how each of them works to best fit your requirement.
Here is a look at six commonly used retirement focussed investment products.
1. National Pension System (NPS)
The National Pension System (NPS) is a long-term retirement focused investment product managed and regulated by the Pension Fund Regulatory and Development Authority (PFRDA). During the deferment period, one has to invest till 60 years and then start getting annuity from a life insurance company on 40 percent of the corpus, while the balance can be withdrawn. The return during the deferment period and neither the annuity (pension) are guaranteed and entirely depends on the underlying asset classes which can be equity, corporate bonds, and government bonds, among others. NPS comes with tax advantage on the amount invested, however, annuity remains taxable. To know in detail the various features of NPS and their suitability, click here.
2. Public Provident Fund (PPF)
The Public Provident Fund (PPF) remains a time-tested long-term investment. Since the PPF has a long tenure of 15 years, the impact of compounding of tax-free interest is huge, especially in the later years. The interest rate on PPF is set by the government every quarter based on the yield (return) of government securities. Further, since the interest earned and the principal invested is backed by sovereign guarantee, it makes it a safe investment. To know how PPF can be used to fund one's retirement, click here.
3. Atal Pension Yojana (APY)
Atal Pension Yojana (APY) is a deferred pension plan, and to be eligible, one needs to be between 18 years and 40 years of age and have a savings bank account. Under APY, there are five plans or options providing guaranteed pension of Rs 1,000, Rs 2,000, Rs 3,000, Rs 4,000, and Rs 5,000 per month by the time the subscriber reaches the age of 60. Based on the amount of pension you choose, the premium amount will be determined.
According to PFRDA, "At a time when the interest rate on various financial instruments including savings bank is declining, Atal Pension Yojana as a pension scheme offers a guaranteed rate of 8 per cent assured return for the subscribers and also the opportunity of higher earnings in case the rate of return is higher than 8 per cent at the time of maturity after staying invested in the scheme for 20-42 years."
APY returns are assured and fixed but unfortunately it comes with an investment (and pension) cap. Solely relying on it to meet retirement needs should be ruled out. However, for that shade of debt in one's retirement portfolio, one may consider investing in APY.
4. Employees Provident Fund (EPF)
Under EPF, an employee has to pay a certain contribution towards the scheme and an equal contribution is paid by the employer. The employee gets a lump sum amount including self and employer's contribution with interest on both, upon retirement. The contribution paid by the employer is 12 percent of basic wages plus dearness allowance plus retaining allowance. An equal contribution is payable by the employee also.
5. Mutual funds schemes - retirement focused
There are four mutual funds schemes dedicated to retirement saving - Franklin India Pension Fund, UTI Retirement Benefit Pension Fund, Reliance Retirement Fund, and HDFC Retirement Savings Fund. Although directed towards retirement, they are relatively less exposed to equities, which are considered to have the potential to deliver high inflation-adjusted return over the long term. The lock-in period varies across schemes, typically, 3 percent is the exit-load if redeemed before the age of 58 years and before reaching the target amount. There are no penalties if redeemed after the age of 58 years and one can withdraw the entire corpus.
6. Life insurance pension plans
One may invest in unit-linked pension plans offered by life insurance companies. They haven't been as popular as other pension plans primarily because of in-built guarantees that they have to provide as per the regulations.
Guarantees comes at a cost and not only push costs upwards, it restricts the potential of returns. Not only has the insurer to guarantee the death benefit but also the maturity amount on the vesting age, i.e., the retirement age. On vesting age, the policyholder is assured of 'Assured Benefit', i.e., at least 101 percent of the entire premium paid or the fund value, whichever is higher.
To ensure these, the allocation of one's premium into volatile assets such as equities gets restricted. Lesser the allocation to equities, lesser is the potential to create a higher corpus on retirement. Some insurers may levy 'guarantee charge' before allocating more into equities. Such plans suit conservative investors who are looking at market-linked returns with lesser volatility. On vesting, only one third of the corpus can be commuted, i.e., taken as lump sum and on the balance, annuity from the same insurer is to be had.
What to do
Investing towards retirement may not necessarily be from the above six investments. Remember, there's no one single investment that can be called the best, a combination of more than one may serve the purpose better. None of them are equity-oriented and hence it is better if one earmarks funds through 2-3 equity mutual funds towards retirement needs. The idea is to build a corpus big enough to help you sail through the non-earning period of life.