When your clients think of retirement, they imagine having a leisurely time pampering grandchildren and spending quality time with family. No one wants to worry about finances in their golden years. Having sufficient retirement corpus is however necessary to achieve this dream.
Retirement planning is essential to ensure that your clients maintain their current lifestyle even after retirement. Increase in life expectancy, rise of nuclear families and no secured government pension for a vast majority of the population makes retirement planning a critical goal for your clients.
Here are top three options that your clients can choose from to plan their retirement.
Public Provident Fund (PPF)
This is one of the most popular and safest retirement planning tools. Investments in PPF are locked for 15 years starting from the next financial year from the date of investment. However, partial withdrawal is permitted from seventh financial year onwards. The rate offered by PPF is declared every year by the government so there may be some fluctuations in return. The interest rate is dependent on average bond yield in the preceding year.
Positives:
Since it is backed by the government, safety of capital is guaranteed.
Offers tax advantage. Enjoys exempt-exempt-exempt (EEE) status that is investments in PPF can be claimed as deduction under section 80C of income tax while the interest earned is also tax-free.
Negatives:
Return potential of PPF is lower than equity investments.
Withdrawal from PPF before 15 years is permitted only in special circumstances.
Mutual funds
Mutual funds offer investors a variety of options for retirement planning. While MFs offer dedicated retirement schemes, investors can also plan for their retirement through a mix of debt and equity funds.
If you choose a retirement scheme for your client, his investments will be auto-rebalanced basis his age. These schemes have a five-year (or retirement age whichever is earlier) lock-in.
You can also plan for your client’s retirement through a mix of equity and debt schemes. This gives you greater flexibility to customize his asset allocation based on his/her risk appetite and financial responsibilities. In addition, mutual funds offer a variety of tools to mitigate risk (SIP and STP) and act like a pension (SWP). A mix of these investment options can be utilized for fulfilling your client’s retirement dreams.
Positives:
Offer immense flexibility in terms of asset allocation
Lowest lock-in among retirement planning options (5 years in retirement funds) and no lock-in in majority of the open ended schemes. However, the fund house may charge exit load in case of early withdrawal.
Strictly regulated by SEBI.
Negatives:
Tax benefits available only in select schemes. Most retirement funds do not offer tax benefits.
New Pension Scheme (NPS)
Launched in 2004 by government of India, NPS offers investors a market linked retirement savings option. Under the scheme, an investor can invest maximum 75% of his/her corpus in equities while the rest is invested in corporate bonds or government securities. The scheme offers investors two investment options.
- Automatic asset rebalancing option based on age
- Self-selection option
NPS withdrawals are tax-free as per recent announcements by the Finance Ministry. To give an example, if an investor had to purchase annuity from 40% of the total corpus at the time of retirement or at 60 years of age, this amount is tax exempt. However, returns earned on annuity are taxed. There is no tax or investment requirement on the remaining 60% of the corpus.
Positives:
Invests in both equity and debt; this will help investors build a healthy retirement corpus.
Is tax efficient – investments in tier 1 NPS are eligible for additional tax benefit of Rs.50,000 under section 80CCD. This is over and above the 80C benefit of Rs.1.5 lakh.
Contribution to tier 2 NPS will be eligible for deduction up to Rs.1.5 lakh under section 80C provided the investment is held for a period of 3 years.
Negatives:
Annuity investment is compulsory for 40% of the corpus and returns on annuity are not very high.
Partial withdrawals are allowed. However, NPS subscribers can withdraw up to 25% of their money from their corpus three times in their lifetime.
Investors have an option to choose from only eight investment managers.
