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Investment options for retirement

india Updated: Feb 27, 2013 16:21 IST

Hindustantimes.com
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Every one of us wants a comfortable and luxurious life after slogging for years at work. One good option here is to create a corpus for your retirement and enjoy a king-size life after a certain decided age. Hence, one must work hard for few years to party harder for the rest.

As far as investment for retirement is concerned, everybody lays stress on being an early bird. The early you start, more you will be able to save. But what exactly are our investment options. Let's check out:

Public Provident Fund (PPF)

PPF or Public Provident Fund is an attractive fixed-income investment option as it provides 8.8 per cent post-tax returns, besides a tax rebate of 20 per cent on the invested amount, subjected to a maximum of Rs 1,00,000.

Apart from the returns, another benefit that a PPF has to offer is its tax-free compounded interest. That means, you don't only earn interest in the invested money, but also on the interest earned. All the balance that accumulates over the period of time is exempted from income tax.

Moreover, it has a low-risk investment option, available at selected post office and bank branches. However, the only problem is its lack of liquidity. But when your target is fixed, you don't have to worry much about it.

The loan on PPF is available from third year onwards. The rate of interest charged on loan taken by the subscriber of a PPF account shall be 2% p.a. However, the rate of interest of 1 per cent p.a. shall continue to be charged on the loans taken before 30.11.2011.

The subscription can be paid into the account in one lump sum or instalments not exceeding twelve in a year.

National Saving Certificate (NSC)

National Savings Certificate is again a tax-saving instrument, offering secure returns at the rate of 8.6 per cent and 8.9 per cent per annum for the investment for 5 years and 10 years respectively w.e.f. April 1, 2012, compounded half yearly. As the maturity period is fixed, it is advisable to buy a new NSC with the maturity amount, especially those who are keeping their eye set on retirement.

NSCs can be bought either in your name or under the name of minor, trust, two adults jointly or Hindu Undivided Family. Certificates are available for minimum of Rs 100 up to the amount you wish to invest.

However, here again, the liquidity issue may haunt people as encashment of the certificate is not permissible, except in the case of death of the holder(s), forfeiture by a pledge and when ordered by a court of law.

New Pension Scheme (NPS)

Opening it for general public from May 1, 2009 onwards, Government of India has opened one more avenue of investment. Though the scheme is open for all individuals, but it still has not become the darling of the tax-payers. NPS works on the logic of saving during working years and withdrawing at the retirement. NPS works more like a mutual fund, where you can choose from three available funds - equity, corporate bond or government bond.

If you don't specify any fund, it will automatically select for 15 per cent of equity investment, 45 per cent investment in corporate bond and 40 per cent in government bonds. However, after 36 years of age, your equity and corporate bonds exposure will reduce and share in government bonds will increase. The maximum cap in government bonds is 80 per cent, with 10 per cent each in equity and corporate bonds.

The funds in NPS are managed by State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance, appointed by the PFRDA. However, investors have the liberty to choose their fund manager every year. The best thing about this scheme is the fund management charge, which is a bare minimum of 0.0009 per cent.

An Initial subscriber registration charge of Rs.100/- and a transaction charge of 0.25 per cent of the initial contribution amount will be levied from subscriber subject to a minimum of Rs 20 and a maximum of Rs 25,000. Any subsequent transaction involving contribution upload - 0.25 percent of the amount subscribed by the NPS subscriber.

The minimum contribution in NPS is Rs 6,000 per year with no cap on maximum contribution and periodicity.

NPS falls under Exempt-Exempt-Tax (EET) category. This means that the maturity benefits that you will receive at the retirement stage will be taxable.

Payments will be made once you reach 60 years of age. A part of your invested money (maximum of 60 per cent of your corpus) will be paid out to you as lump sum, and the balance will be mandatorily kept back as annuity. However, in case of untimely death, your nomination will receive this pension.

Buying a property

With realty market getting competitive and a large number of projects coming up, buying a property is catching the fancy eyes and hence fast becoming a lucrative investment destination. Looking at decent capital appreciation, the investment is property can be made in terms of construction linked or built structures.

Here, where construction-linked property will give you ease of prolonged payment structure, a fully-built house can make way for immediate rental income.

Particularly for people looking forward to the retirement, this investment can be made with the corpus, where rental income can be used as monthly pay-outs.

Mutual funds

These are considered as best investment instruments due to the sheer variety, low costs, tax benefits and professional management. Equity mutual funds, which invest up to cent per cent of money in stocks, which can easily give 12-15 per cent returns a year on an average in the long-run. This makes them ideal for those with a high risk appetite.

However, those with slightly lower-risk appetite can opt for equity-oriented hybrid funds, which invest 65-70 per cent in stocks and the rest in fixed income securities such as bonds and treasury bills.

Long-term capital gains from equity mutual funds (with over 65 per cent equity exposure) are tax-free, making them all the more attractive.

Insurance

There are many variants of life insurance policies available in the market. And one of utmost important and widespread ones are insurance policies. Here, we particularly that aim at building a corpus. A corpus can be built to meet the demands at various life stages. Here, investor can choose the period when he / she would be requiring the money (retirement age) and the amount required (retirement corpus).

Some of these plans come in the name of wealth creation plans, pension ULIPs, traditional pension plans, monthly income plans, etc.

Unlike other pension instruments, the advantage of insurance is -- you can withdraw money to meet emergencies as well as invest surplus money (i.e. top-ups) over and above the premium amount. The rate of interest depends on the investment instruments - equity or debt, as well as how well the market fares.

Some insurers have launched capital-guarantee ULIPs - Tata AIG's InvestAssure Future Capital Guaranteed fund, HDFC SL Capital Guarantee 5 Year Pension Fund - II, etc. Such products aim to guarantee the premiums paid by the individuals (net of expenses) plus the bonus declared, on maturity. Individuals, who fear 'loss of capital' in a ULIP, will find such products attractive.

However, capital-guarantee ULIPs have lower equity exposure, which could dampen returns for the aggressive investor.

Pension plans come with various annuity options, which are explained below:

• Lifetime annuity without return of purchase price: Under this option, the individual receives pension for as long as he lives. The pension ceases on occurrence of an eventuality and the insurance contract comes to an end.

•Annuity for life with a return of the purchase price: If this option is exercised, the individual receives pension till he is alive. In the event of an eventuality, the purchase price of the annuity (maturity amount) is paid out to his nominees / beneficiaries.

•Lifetime annuity guaranteed for a certain number of years: Under this option, the individual receives a pension for a certain prescribed number of years, irrespective of whether he is alive for the said period or not. A major positive of this plan is that if policy holder survives the period, he continues to receive pension for the rest of his life.

•Joint life/ Last survivor annuity: The individual receives a pension till he is alive. In case of an eventuality, his spouse receives the pension. Apart from the options mentioned above, some companies also offer both, 'with' and 'without return of purchase price'. Under the 'Joint life / last survivor annuity with return of purchase price', in case of an eventuality to both the individual as well as his spouse, the purchase price of the annuity is 'returned' to the nominee. Evidently, pension plans help individuals prepare for their retirement needs. Not only do they aid in building a corpus over a period of time, but they also provide income for life. That is why it is important that individuals include pension plans while conducting their retirement planning exercise.

With this army of options in your hand, planning for retirement does not look tough at all, provided you are clear on decisions like when you want to retirement and what amount of money will you be requiring then to live a comfortable lifestyle. All the best and happy investing!