New Delhi: Indian Middle Class, especially people around the age group of 45 are getting into a pension trap.
It was explained time and again that we should start saving for pension/retirement plans, when we are young.
So that the power of compounding will be on our side and even a small savings in the earlier years will help us more in the later years.
But still in our endeavor to live a better today, we normally ignore the need for a safe tomorrow.
Here, we are listing some of the basic requirements one should consider when any one is planning for a pension plan. These are basic essentials, which should definitely be considered before finalizing, and then only a safe and secure retirement period could be envisaged.
Be focused. Never try to look at additional/ancillary benefits. Each of the additional benefits does cost and reduces the maturity benefit.
The intention of any pension plan should always be to generate maximum retirement corpus only.
There should be a regular and committed outflow towards the goal till the retirement age and there should not be any commitment after the chosen retirement age.
Generally only the inflation alone is counted for the requirement of funds post-retirement and not the standard of living changes – in fact in the last few years, standard of living changes constitute the major increase in the expenditure pattern rather than inflation.
Also inflation is generally counted only up to the retirement age and not afterwards – whereas the inflation does continue till one survives.
Because of the above two factors, the following investment options to be followed:
1. At the time of calculating the returns, try and ensure the lower level of returns and thus create a cushion of the differential higher returns.
2. Try to ensure that in the initial years of retirement, the income generated by the corpus will be adequate to meet the living expenses and subsequently when it is not sufficient, one can start encroaching into the principal, which will sustain rest of the life.
3. The entire corpus generated should be available for an immediate annuity option from the retirement age.
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4. There should not be any flexibility or liquidity options for the pension plan. The entire corpus should predominantly be committed for the annuity option and there should not be any withdrawal facility during the contribution (wealth creation) period – as it is only a very limited portion of individual’s investments are channeled for the pension option and hence we should not seek any liquidity option in these funds also.
5. There should not be any commitment at this stage about both the annuity options as well as service providers for the distribution of annuity – Once the pension options open up in India, we might see a variety of more suitable options available and if any one commits at this stage it will not be appropriate.
6. When we look into unit-linked plans (they are really the best for long-term), we should also look into the overall cost structure, which impairs the total return in the long-term as well as the performance of the fund and the group as such.
7. When base expenses are counted, we should also include all the expenses currently reimbursed by the company and incremental expenses to be incurred both for medical and traveling.
8. Last but not least, the tax benefit in any pension plans are clearly defined – the accumulated corpus will be tax-free and only the annuities at the time of receipt are taxed.
We will have the flexibility to frame the annuity cycle at the time retirement and the same can be worked out at the time of maturity depending upon then prevailing tax rates.
Making any guesses about the tax structure to be prevalent that time will be really hazardous.
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