Do you find it difficult when you need to choose a retirement plan and investment option?
More often than not, when you seek guidance on the investment options available, there are many plans, schemes and financial terms which may lead what is commonly known as the ‘paradox of choice’.
What you would want to do is invest in a plan that is suitable for your current and future financial needs. As you look at retirement, you have to plan and factor in the following:
As individuals, we want a secure future and a comfortable post-retirement life; annuities (pensions) help achieve this by protecting us from unpleasant situations. Annuities can be bought to generate income during retirement, and because by nature these are similar to pensions, they are called pension plans. Some Mutual Funds have started offering pension plans which have an investment in both debt and equity components.
Here is a brief note on pension plans and mutual funds to help you make an informed decision basis what suits you and your personal needs.
Retirement / Pension Plans and Mutual Funds - The basics you must be aware of
When life insurance companies mention retirement plans and pension plans, they are referring to bundled products that offer the combined benefits of insurance and investment.
1. Deferred pension plan - This type of pension plan has two phases – the accumulation phase and the distribution phase.
If you begin investing when you are 30 years old, with a plan to retire at 50, and assuming you live for another 30 years after retirement (till the age of 80), then the accumulation phase will last 20 years while the distribution phase will span 30.
Note that in most retirement plans, the age at which you will start receiving a pension (called the vesting age), is typically in the 40-70 years age bracket. As your targeted retirement age is 50, you are well covered in this respect. The period when a person gets a pension is also known as the annuity phase.
2. Immediate annuity plan – In this retirement plan, the investor can pay lump-sum, instead of contributing over the years and can start receiving income immediately. The frequency of payments received can be monthly, quarterly, half-yearly or annually.
There are many annuity plans on offer in the market, and their variants: e.g., the steady monthly income, the increasing monthly income etc; choose one based on your preferences, financial requirements and premium payment capacity. However, remember that while an income source for life is guaranteed, it is a lump-sum one-time investment, whether one chooses immediate income or deferred income.
3. Mutual fund retirement plans –In a mutual fund retirement plan, you can opt for a systematic withdrawal system and you do not have to buy an annuity. This provides you with liquidity to meet your immediate cash flow requirements.
SIP, or the Systematic Investment Plan, is a scheme to invest a fixed amount regularly at a specific frequency, say quarterly or monthly. It ensures that you invest a fixed amount regularly and reward you with long-term financial gains, the potential for which is immense.
It is flexibile in terms of termination or modifying amount, which ensures easy cash flow: the plan can be terminated when you want after submitting a written request. In a month’s time, the SIP will be discontinued. (Note: One can increase or decrease the sum being invested by ending the existing and starting a new one; this offers protection from market volatility.
The ‘Why’ and ‘Why Not’ of Pension Plans ?
Advantages of pension plans
Short-term instruments such as the Post Office Monthly Income Scheme (POMIS) carry reinvestment risk (of lowered interest rates), but an annuity guarantees you the same rate of payout for life. And unlike the POMIS or Senior Citizens Savings Scheme (SCSS), there is no cap on annuities.
Disadvantages of pension plans
Moreover, some amount of the maturity amounts is taxable, which actually makes it less attractive for investment.
The ‘Why’ and ‘Why Not’ of Mutual Funds
Advantages of mutual funds
Since these schemes are expected to pool savings for retirement, you have the flexibility to lock-in the money till your retirement or redeem it before that.
Disadvantages of mutual funds
Given the ‘why’ and ‘why not’ of pension funds and mutual fund retirement products, a best-suited plan is one that meets your requirements, is appropriate based on your age, suits your budget, fulfils your financial goals, satiates your investment appetite and is aligned with your retirement plan. Choose wisely and make a timely investment to materialise your retirement plan. Here’s how