1. Further to my Article ‘Retirement Benefits and Tax Liabilities‘ dated 09 April 2020, the major challenge with the person is where to invest the retirement money to get steady inflow and live life without any financial stress Depending on individual’s financial health, physical health and family commitments, various options may be evaluated.
2 Emergency Fund : First and foremost task to do with the retirement benefits is to create an emergency fund . Each one of us need to become self-reliant in taking care of emergency situations after retirement. A provision for minimum 6 months of expenses including medical expenses needs to be kept as emergency funds to take care of contingencies.
2.1. The primary goal of the investment in emergency fund is to protect rather than generate a high level of current income. This account should not be included as an asset available to produce retirement income.
2.2. The best places to park emergency funds are liquid mutual fund schemes. These schemes provide better returns than keeping in bank savings account. Selected liquid fund schemes give Debit card facility as well. The emergency fund needs to be increased year after year based on the inflation and change in lifestyle.
3. The next recommended investment options which help to create a monthly income stream with low risks are – Senior Citizen Saving Scheme (SCSS), Recurring & Fixed Deposits and Pension Plans .Details of these options are brought out in succeeding Paragraphs.
4. Senior Citizen Saving Scheme (SCSS ) : The SCSS is the one of the best scheme for the person who is looking for less risky product with the minimum tax outgo.
4.1 The scheme offers capital protection, along with quarterly interest payment as a source of income.
4.2 The maximum that can be invested in this scheme by any individual is capped at Rs 15 lakh.
4.3 Lock in period is 5 years for the principal. Premature withdrawal is allowed after the completion of one year on payment of penalty.
4.4 SCSS is backed by the government and, therefore, offers a sovereign guarantee.
4.5 Interest income from SCSS can also help Retirees Bridge the gap between their pension and the last salary drawn. Interest earned on deposits under this scheme is payable quarterly.Interest rate w.e.f. 01 April 2020 is 7.40 %
4.6 How to invest in SCSS : A senior citizen can invest in this scheme by opening either an individual or a joint (along with the spouse) account with a post office or a scheduled commercial bank. The account opening application form requires details such as PAN, address proof, age and number of accounts already opened under the scheme and the amount deposited in each account.
4.7 The account can be opened with cash amount if investment amount is below Rs below Rs 1 lakh . Cheque need to be deposited for investment amount above Rs 1 Lakhs. The cheque realization date in the Government Account will be taken as the investment date .
4.8. Maximum permissible investment amount in this scheme is Rs 15 Lakhs The amount invested in the scheme cannot exceed the money one receives on retirement. Therefore, one can invest either Rs 15 lakh or the amount received as a retirement benefit, whichever is lower.
4.9. List of Documents Required : List of the documents required for investing in the scheme are as follows
(a) Duly filled application form, available at the post office or bank
(b) Know Your Customer (KYC) form
(c) Photographs of the applicant/s
(d) Permanent Account Number (PAN)
(e) Address proof
(f) Age proof
(g) In the case of retirees, a certificate from the employer, stating the retirement was on superannuation or otherwise, retirement benefits, employment held (designation) and the period of employment.
(h) Proof of date of disbursal of the retirement benefits
5. Recurring Deposits and Fixed Deposits : Fixed Deposits (FD) AND Recurring Deposits (RD)) are the most secured types of investments made by retired individuals.
5.1. Banks also offer a comparatively higher rate on FDs and RDs for pensioners.
5.2 Under Section 80TTB of the IT Act, an interest income up to Rs.50,000 for senior citizens during a financial year is completely tax-free.
5.3 Investments in post office FDs and RDs offers the same tax benefits as that of the bank deposits. However, post offices offer an additional layer of security on deposits. The funds in post office deposit account are directed towards the government funds to ensure that there is no delay in payments.
6. Pension Plans Pension plans are also known as retirement plans. In this, some portion of income may be invested into the designated plan. The main objective behind a pension plan is to have a regular income post-retirement. Considering the ever-growing inflation, investing in these plans has become necessary. It s good to invest in Pension plan even with considerable savings in out bank account. It is because savings usually get spent in meeting contingent needs. So, the best pension plan will support us when all other income streams cease to exist.
6.1 Tax implications of pension plans :The contributions that are made to a pension plan, under Section 80CCC, are tax-exempt up to a maximum ceiling of Rs 1.5 lakh..The withdrawals, however, are not tax-free. one-third of the corpus of superannuation Pension fund available to the retiree soon after reaching the retirement age is tax-free. The rest of the money is distributed as an annuity and is subject to taxation depending on the retiree’s tax rate at the time of retirement.
6.2 Types of Pension plans : There are mainly three types of pension plans available in India :
(a) Plans sponsored by an insurer where the investment is solely in debt and are best suited for conservative investors.
(b) Plans that are unit-linked and invest in both equity and debt.
(c) The National Pension Scheme, which invests either 100% in government securities, 100% in debt securities (other than government securities), or a maximum of 75% in equity.
7. Classification of Pension Plans :The classification of pension funds can be based on the following Plans:
7.1 National Pension Scheme : In a new Pension Scheme , investment made in debt and equity market, based on our preference. It allows to withdraw 60% of the funds at the time of retirement and the remaining 40% is used for the purchase of the annuity. The maturity amount is tax-free.
7.2 Pension Funds : The remaining 40% corpus of Natonal Pension Scheme need to be invested in Annuities The Government body, Pension Fund Regulatory and Development Authority (PFRDA), has authorized six companies to operate as fund managers for the purpose. These plans offer comparatively better returns at the time of maturity and remain in force for a substantial amount of time.
7.3 Immediate Annuity Plan : The pension starts immediately after investing lump sum amount in an immediate Annuity Plan . The return is based on the amount invested by the policyholder . A range of annuity options are available with the investor . The premium paid for immediate Annuity Plan is exempted under the Income Tax Act of 1961.
7.4 Deferred Annuity Plan : This plan is good option for start investing in early age of life Accumulation of corpus can be achieve through regular premiums over the term of the policy. The pension begins once the policy term gets over. This deferred annuity plan has tax benefits wherein no tax is charged on the money invested until plan to withdraw it.
7.5 Pension Plans with and without cover : Pension plans with cover include life cover, which means that at the death of the policyholder, the family members are paid a lump sum amount. This amount may not be considerable. The without-cover plan as the name suggests does not have life cover. If the policyholder passes away, then the nominee gets the corpus. At present, the immediate annuity plans are without protection, while the deferred plans are with cover.
8. Beat the inflation before it beats you : Our financial planning should be in such a way so that the expenses at least after 10 years of the retirement can be accommodated with the returns . A handsome retirement corpus , if not invested properly ,may not be sufficient to take care of all our needs after few years of retirement because of the skyrocketing inflation figures.
9. A right financial advisor could give detailed investment advice to have a financially secured retirement life.