Retirement benefit plans

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retirement.jpgCome February-March and the things that occupy most Indian minds are the exams around the corner and taxes. So maybe it is also time that people took some unsolicited but much needed advice from us on retirement options available in the market. As in everything the market has opened up and the options are huge.

Earlier there was not much a person could do. You had the provident fund, gratuity and one insurance cover and lived frugally and prayed that it would be enough to cover marriages, housing and medical bills. Thankfully, now the instruements of savings are more varied and flexible. Also the employers are willing to extend a helping hand. Some companies have options for medical insurance and some others include, education and other benefits.


It is always preferable to have a mixed portfolio, parameters like convenience, efficiency, rate of return are variable. When planning for retirement benefits it would be best to go in for a pension policy during the prime earning years.Don’t be sceptical of policies from LIC and UTI. These are more than a fallback of last resort ,they are a good avenue for investment especially for those who want to play it safe. LIC policies come with the additional benefit that risk on the life of the insured person is covered for the full sum. The person gets his pension so long as he is alive. At his death, the nominee gets the assured sum with the guaranteed additions.


These instruments from LIC and UTI have an additional advantage in that they don’t require regular monitoring unlike other instruments such as fixed deposits, debentures, company deposits etc. Apart from the very obvious Public Provident Fund, other popular schemes are LIC’s Jeevan Dhara, Jeevan Akshay and Jeevan Suraksha, while UTI offers the Retirement Benefit Plan (RBP) and now there are numerous private insurane firms just waiting to customise your retirement benefits.


But beware some LIC plans offer pension for life but eats up the capital.


You may also choose a plan without a life cover, offering only a pension. But do not go in for these if your objective is to save, since the returns on these plans are unattractive compared with others. Consider this. Jeevan Suraksha, for example, has five options. The minimum age of entry to the policy is 25 years and the maximum, 60 years. You can opt to receive pension when you turn 55. Tax breaks are available under section 80 CC of the Income Tax Act on contribution to the pension plan.


But the pension itself will be fully taxable. If you are in the 30% tax bracket and set aside Rs 250 a month in Jeevan Suraksha, it amounts to investing Rs 175 a month, allowing for the tax break. This, over 30 years, according to LIC’s tables, will grow to a corpus of Rs 5.84 lacs, without a life cover and even less with one. On this capital, LIC pays about 13% a year as pension, fully taxable. If you check out the public provident fund, the Unit-Linked Insurance Plan of the Unit Trust of India and systematic investment plan of a good mutual fund, you will find the return at least two-three percentage points higher.


Whatever cover you go for, you will get some tax break anyway.


Another mistake we often make is that once we take an insurance we tend to forget about it and take it easy. Even if the same cover has been taken at the age of 18 or 21. It needs constant reviewal and has to take into account the future financial needs of your family, the state of your health, anticipated inflation rate and the financial performance of your other investments.


Moves to let the private sector and foreign firms into the insurance sector have made the sector more dynamic, the options are tremendous, there is Metlife, Prudential and many non banking financial institutes are also moving into it. They have special pension schemes,with variable instruements to chose from. But remember the parameters for chosing one remain the same. Only thing is that now you can customise a plan to suit your needs.


The ultimate beneficiary of your insurance is not you, but your dear ones. Hence always share the details.


For most people, because there are limits on contributions to alternative investments such as pension plans, and mutual fund investments are subject to taxation every year, one of the best solutions to the problem of saving enough money for a comfortable retirement is a variable annuity. Although contributions to annuities are not tax-deductible, the investment earnings accumulated on a tax-deferred basis are taxable. There is no limit on the amounts that can be invested and everyone can participate.


Variable annuities can be started with low amounts, by anyone who is 18, and regular deposits can and should be made thereafter. Contributions can be invested in a variety of investments, such as domestic or international equities, bonds, or in the money market. Over long periods of time, the historical evidence shows that equities provide the highest returns


Annuities can be very flexible! When the annuitant dies, there is a death benefit, usually the greater of the original investment or the current value of the account. Thus, a Variable annuity can be considered as equivalent to a mutual fund combined with life insurance into one package.


Portfolio management fees are of the range of 2%-3% of the value of the portfolio and are deducted annually. When transactions are made in the portfolio, brokerage fee are incurred. Depending on the activity in the portfolio, these expenses can sometimes be as high as 8%. Some mutual funds can also charge fee of up to 1% of portfolio value for advertising and distribution. Thus, for mutual fund investments, the annual expenses can be as high as 10%. Comparable fee for annuities typically are much lower. Sales costs for mutual funds are sometimes as high as 8% or 9% of the amounts invested, but typically less, in the range of 3% to 5%. These costs are called loads and may be front-end (deducted at the start) or back-end (deducted when the investor sells) or both. It is never too late to start a retirement plan, if you do not have one already but please do an annual review.


(with online content inputs)


Issue BG36 March04



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