According to a survey in United Kingdom, more than 50% of people do not save enough for their retirement. The number is worse for Americans and Canadians. 150 million Americans out of 200 million, who are in working age, are not saving enough to fund their needs after retirement. Similarly, 80% of Canadians will not have a comfortable life after retirement. Countries like America, UK, and Canada offer many benefits for old age people in terms of social security. However, this amount is small and doesn’t guarantee a good life.
The situation in India is worse because there is absolutely no social security for a large mass of people. With increasing prices and longevity, the need for sufficient corpus is of paramount importance. In this article, we will take a look at some of the pension schemes available in Indian market and how can we make the most out of them.
A pension plan is a scheme where people invest in order to withdraw a specified sum of money periodically after they retire. They can also withdraw in lump sum amount but this is not advisable. People invest in many instruments for their future requirements. These instruments differ in returns and structure of products.
Employee provident fund (EPF) –
EPF is a scheme which allows employees to contribute certain part of their income for their provident fund. The advantage of this scheme is that the employer contributes equal amount. EPF is the most widely used pension plan. This gives 8.6% returns on the savings. Investors should keep an eye on EPF rate as it keeps changing. At the same time, the interest earned on it is not taxable. Nowadays, individuals also get annual statement from their company which helps them plan better for post-retirement needs.
Public Provident Fund (PPF) –
PPF is another pension scheme, which allows individuals to save a certain amount. The return is 8.8% and the tenure is 15 years. Please keep an eye on the rate as it keeps changing. Due to the flexibility that PPF offers, it has become a very popular instrument for employees to plan for their retirement. Individuals can save Rs 500 to Rs 1,00,000 every year. It is offered by many banks and post offices. Since the interest rate is known, individuals know how much they are going to receive at the end of the tenure. If individuals want to extend the tenure, they can do it in a slab of 5 years.
There are other savings scheme by Government and banks that are also used by individuals for their retirement plan.
Pension funds –
Pension funds are mutual funds offered by fund companies. These funds are mainly of three types – aggressive funds, balanced funds, and conservative funds. Aggressive funds invest major part of their fund in equity. Balanced funds invest a part of fund in equity while conservative funds invest almost all in debt securities. Needless to say, Equity funds are the most risky of them. Balanced funds are risky compared to conservative funds because of equity exposure. However, looking at the time horizon of individuals, equity funds and balanced funds can give better returns over long term. Conservative funds are less risky and hence give low returns. In general, equity funds can give 12% to 18%; balanced funds can give 10% to 15%; while conservative funds can provide 7% to 10% returns over long term.
Few pension funds launched by mutual fund companies are the following. The list below is merely indicative and is just an illustration for the sake of providing examples.
|Type of Fund
|Returns since inception
|UTI – Retirement Benefit Pension Fund
|Hybrid fund, debt oriented
|40% Equity, 60% debt and liquid
|Tata Retirement Savings Fund – Moderate Plan
|Tata Mutual Fund
|Equity Oriented Hybrid Speciality Funds
|85% Equity, 15% debt and liquid
|Templeton India Pension Plan (G)
|Equity Oriented Hybrid Speciality Funds
|35% Equity, 75% debt and liquid
There are other mutual funds which offer the same. The funds mentioned here also offer different variants. The variants can be aggressive plan or conservative plan depending on exposure to equity. The variants can also be dividend or growth depending on payment structure of the fund.
Unit Linked Pension Plan –
There are pension plans which are linked to the market. These plans expose investors to higher risk but the return will also be high in longer term. However, investors must be careful in choosing the unit linked pension plan. You may not want to take too much of risk while planning for your retirement. Some of the unit linked pension plans are HDFC unit linked pension plan, Kotak retirement income, ICICI pru lifetime pension maxima, and many others. Investors should do more research on past performance to select the right one.
The pension funds, while offering a great way to plan your retirement, also penalize you hard if you redeem it before time. Most of the funds do not charge you anything if you redeem after 5 years. However, they may charge as high as 3% to 5% if you redeem within 3 years.
There are other opinions on retirement planning such as buying good, performing mutual funds and take term insurance at the same time. This can also be a very effective tool for retirement planning but investors need little more knowledge to form an effective portfolio.
Finally, investors must separate insurance and investment for retirement. There are many products which combine these two. The best way to judge whether you should go for such products is to know their past returns. An insurance product will have low returns which will not be right for an investment product.