Retirement Planning for Beginners | Retirement Planning Guide & Tips

All other life goals can be adjusted with or delayed but Retirement is one thing, which will happen!

 

Yes the age may differ from person to person. Each one must plan for retirement first. It is actually easy, if we follow some discipline towards achieving this goal.

 

 

how retirement ready are you - retirement planning guide tips for beginners

 

According to the Aegon’s Retirement Readiness Index, India ranks first with a score of 7.3 out of 10, ahead of the BRIC-Brazil and China counterparts. However, if you analyze the data further, you will realize that Indians use Bank Fixed Deposits and Life Insurance as their primary retirement planning tools.

 

This is contrary to the products primarily used by the rest of the world, i.e. mutual funds, annuity, offshore funds, etc. 83% of Indians believe that retirement readiness should be a shared responsibility between the individual, employer and the Government.

Thus, a stronger drive and thrust towards retirement planning is of utmost importance.

Beginner’s Guide To Saving For Retirement

Things you should do to reap the benefits of all the hard work you have done and enjoy a relaxed retired life have been highlighted below:

1. Start Early

 

it is never too early to plan for your retirement - start early retirement planning

As they say, ‘It is never too early to plan for your retirement’. The earlier you start saving, the easier it would be for you to achieve your goals.

Start with small amounts at an early age. It helps to build up a higher corpus due to the ’ of investment.

the compounding effect of investments - retirement calculator

We can clearly see the difference in corpus when Raj and Seema started saving Rs 5000 each but Seema started 10 years later and thus had less than 1/3rd the corpus that Raj could make with the same investment.

Some things that you can keep in mind while doing so are:

  • Retirement is not a destination. It is a journey. Hence the retirement corpus needs to grow even when you start withdrawing from the same, in order to combat inflation.
  • Do not withdraw the amounts that are kept aside for retirement, not even to buy a house. For e.g. Employee Provident Fund (EPF) is a part of corpus to be built for retirement and should not be withdrawn when you change a job.

 

2. Consider Value of Money and Inflation

 

value of money and inflation control - retirement planning for beginners

When planning for retirement one needs to consider the fall in value of money due to inflation. In simple words, a dozen of bananas that costs Rs. 20/- ten years ago, now cost Rs. 60/-.Thus, the value of Rs. 20/- has reduced over the time, due to inflation.

Thus, while computing the amount of money that you require at the time of retirement, you need to consider inflation and then back calculate the amount that you need to invest today.

Also, with increased life expectancy, any miscalculation of inflation would discomfort your retired life.

Let’s take an example of a 30-year-old who expects to retire at 60. His life expectancy is approximately 80 years and his monthly expenses now is Rs 40,000. With no rise in lifestyle, which is an unnatural expectation, and an inflation of 6% p.a. for a period of 30 years:

calculation of monthly expenditure - value of money and inflation

This means, your monthly expenses would become Rs 7.36 lakhs per month by the time you are 80 years old. And all of this assuming the lifestyle remains constant! This is BIG MONEY! Have you thought about it?

3. Proper Asset Allocation

 

proper asset allocation - retirement planning for beginners tips

A basket of investment options are available in the market and you need to choose the right one at the right time. Thus, if you start investing at an early age, you can choose investing in equity linked mutual funds, which would provide higher returns than bank FDs and definitely are more tax efficient.

Ideally, retirement planning basket should be a mix of EPF, PPF and Mutual Funds. You need to consider your overall asset allocation and maintain your equity allocation over all the years, in order to beat inflation.

One thing that is to be considered while choosing any asset class is that the real return on the investment has to be positive.

That is, if the interest earned on a fixed deposit is 8%, while the inflation stands at 10%, the real return on investment is negative as inflation eats up the interest income earned on deposit.

Each person has his perfect Asset-allocation mix which depends on his age and risk appetite. Thus, if you know your ideal Asset Allocation Mix, you should try to achieve that at all points of time.

Typically, a 30 year old would have a higher risk appetite than a 60 year old because of age being on his side. However, it also depends on your current liabilities, family wealth, dependents, etc.

Maintaining the minimum requirement percentage in equity is one of the easiest ways to build a sound retirement corpus!

4. Provide for Medical Insurance

 

major expense post retirement is towards medical expenses - retirement planning for beginners

Typically, household expenses are expected to reduce post retirement with no more EMIs to pay or no more expense towards children’s education. However, the major expense post retirement is towards medical expenses.

A major illness may toss away your entire financial planning. It is therefore to have a health insurance policy.

Most of the times people depend on the health coverage provided by the employer only. Many insurers provide for continuation of the same health plan provided by the employer. But insurers of the employer may change and also their clauses.

It is, therefore, advisable to have an individual policy in place which is operational post retirement.

Since health plans are lifetime renewable, you must continue the same till the last day.

5. Think of Alternate Source of Income & Develop a Skill Set

 

alternate source of income & develop a skill set - retirement planning for beginners

In today’s world ‘change’ is permanent and inevitable. Any change in technology, policy or a global turmoil may result in losing a job or closing down of business.

Also, with increased stress levels, people want to retire early. It therefore becomes important to develop a skill, which can generate income in case you need to give up your job early.

6. Make a Will

 

make a will, save for our loved ones - retirement planning for beginners

If you have yet not made a will, make it now. While we save for our loved ones, it’s important that they don’t face any difficulties in our absence.

It is not only important to abridge our spouse or children about our investments, it is also important to make a ‘will’, which would legalize their rights.

retirement planning for beginners - assured a comfortable life - post retirement

At the end of all the retirement planning, you would be assured of a comfortable life post retirement. Post retirement life should be stress free and the only way to make it happen is to build a healthy corpus and stay fit!

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Investwell July 16, 2019 0 Comments

All You Need To Know About The National Pension Scheme (NPS)

Having a sufficient corpus after retirement is what everyone wants so that they can lead a comfortable retired life. While there are various avenues which help build up a retirement corpus, having an earmarked avenue which is meant only for retirement funding is better.

 

With this sentiment in mind, the National Pension Scheme was launched on 1st January, 2000. In the initial years the scheme was open only for the employees of the Central Government except the armed forces.

 

Later on, in the year 2009, the scheme was opened to the general public. Currently, any individual can invest in the NPS scheme to create a retirement corpus.

What is NPS?

 

NPS is an investment scheme where individuals can contribute regularly when they are earning an income. Thereafter, after retirement, the invested corpus can be partially withdrawn in lump sum and partially used for availing annuities.

 

who can and how can i invest in nps

 

Who can Invest in NPS?

 

Every Indian citizen in the age bracket of 18 years to 60 years can invest in NPS. Even NRIs can invest in NPS if they want. However, if the citizenship of the NRI changes the scheme would be closed for them.

 

How to Invest in NPS?

 

You can invest in NPS scheme through financial institutions which are called Point of Presence (POP). Almost every Indian bank and other financial institutions act as POPs which allow you to invest in the NPS scheme with them. Their authorized branches act as collection points where you can deposit your money. These collection points are called Point of Presence Service Providers or POP-SPs.

 

You can get the list of POPs on the website of Pension Fund Regulatory and Development Authority (PFRDA) (https://www.npscra.nsdl.co.in/pop-sp.php ) which is also the governing body of the NPS scheme.

What are the Documents Required When Opening a NPS Account?

 

what are the documents required when opening a nps account

 

After you have located the POP, you can invest in the NPS scheme by submitting the investment amount and your relevant documents. The documents which are required to open the NPS account include the following –

 

  • Registration form
  • Identity proof
  • Age proof
  • Address proof

Different Types of NPS Accounts

 

When you choose to invest in NPS, you would have the choice of three types of NPS accounts. These types are as follows –

  • Tier I Account is the account into which contribution is compulsory. Withdrawals are restricted till the investor attains 60 years of age. Even at that time, withdrawal from the account is restricted and subject to conditions. The minimum investment required in this account is INR 6000 yearly.

 

  • Tier II Account is a voluntary account chosen by the investor. It can be chosen only if the investor has an active Tier I account. The contributions made into this account can be withdrawn anytime as per the discretion of the investor. The minimum investment is INR 1000 to open the account and at the end of a year the minimum balance in the account should be at least INR 2000.

 

  • Swavlamban Scheme is meant for the economically weaker sections of the society. Under this scheme, the Government contributes INR 1000 every year for 4 years to the NPS scheme. The scheme is available for individuals who are economically weak and have opened a NPS account in the year 2010-11

 

Multiple NPS accounts are not available. Investors can invest only in the above-mentioned types of accounts. Moreover, if the minimum investment criterion is not fulfilled, the NPS account is frozen. To activate the account the investor would have to visit the POP and pay the minimum required amount with a penalty of INR 100.

The Basics of Investing in the NPS Scheme

 

basics of investing in the nps scheme

 

When investing in the NPS scheme, you would have two choices of investments –

 

  • Active choice – this choice is when you manage your investments on your own. There are three types of funds available for investment under this choice which are –

 

  1. Asset class E which invests at least 50% of its portfolio in stocks
  2. Asset class C which invests in instruments having fixed interest rates except Government securities
  3. Asset class G which invests only in Government securities.

 

Under the Active choice of investment, the investor can choose to invest the money either entirely in C and G asset classes or in a combination of E, C and G classes with a maximum limit of 50% when investing in asset class E.

 

  • Auto choice – under this choice the investor doesn’t have to manage his investments. The investments are managed automatically based on his age. Investment is done in a predetermined manner as directed by the PFRDA. If the investor is aged 18 years to 36 years, 50% of the money would be invested in Asset class E, 30% in C and 20% in G. This ratio would remain constant till the investor attains 36 years of age. Once the investor attains 36 years of age, the percentage of investment in classes E and C would decrease annually increasing the investment in Asset class G. This reduction in E and C and increment in G would continue every year till the asset allocation becomes 10% in E, 10% in C and the remaining 80% in G when the investor is 55 years of age. Thereafter, the allocation would again remain constant.

 

The money which is invested in the NPS account is then managed by pension fund managers who are registered with PFRDA. Presently, PFRDA has registered eight fund managers which are as follows –

  1. LIC Pension Fund
  2. ICICI Prudential Pension Fund
  3. Reliance Capital Pension Fund
  4. Kotak Mahindra Pension Fund
  5. UTI Retirement Solutions Pension Fund
  6. SBI Pension Fund
  7. DSP Blackrock Pension Fund Managers
  8. HDFC Pension Management Company

Investors can choose to invest in any type fund and as per any investment strategy to build their retirement corpus. They can also choose their fund managers for managing their money. Moreover, once the investment strategy and asset class is selected, it can also be changed once in a financial year in both Tier I and II accounts.

Permanent Retirement Account Number (PRAN)

 

permanent retirement account number (pran)

 

When you invest in the NPS scheme you are allotted a PRAN card which is like a PAN card for retirement benefits. The card contains a unique PRAN number, your name, your father’s name, signature or thumb impression and your photograph. You can apply for the PRAN card online or offline. The method is as follows –

 

  • Online application – you would have to visit the website of NSDL, download the PRAN card application form, fill the form and submit it online. Once the form is submitted, the PRAN number is generated

 

  • Offline application – you would have to visit the website of NSDL and download the PRAN card application form. Then you would have to fill the form, attach your KYC documents and mail the form and documents to NSDL’s office. Once the form is verified, the PRAN would be generated.

 

Maturity or Withdrawal from the NPS Account

 

maturity or withdrawal from the nps account - all you need about nps

 

While withdrawals from Tier II accounts are allowed freely, Tier I accounts have restricting conditions. These conditions are as follows –

 

  • If the investor wants to withdraw the money and exit from the scheme before attaining 60 years of age, 20% of the corpus is allowed to be withdrawn in lump sum. The remaining 80% of the corpus should be used to purchase annuities.

 

  • Partial withdrawals are also allowed from the scheme before the investor attains 60 years of age and the scheme matures. Partial withdrawals are allowed for up to 25% of the corpus from the third year after opening the NPS account. These withdrawals are allowed for specific purposes like medical contingencies, children’s education, marriage costs, etc. such withdrawals can be made for a maximum of 3 times during the tenure of investment and each withdrawal should have a minimum gap of 5 years.

 

  • If the investor has attained 60 years of age and wants to quit the scheme, 60% of the corpus can be withdrawn in lump sum. The remaining 40% of the corpus should then be used to avail annuities.

 

  • If the total corpus at the time of maturity of the scheme is below INR 2 lakhs, the entire amount can be taken in lump sum

 

  • If the investor dies before attaining 60 years of age, the nominee can withdraw the entire corpus in one lump sum.

 

So, withdrawal from the NPS Tier I account can be summarized in the following way –

Moreover, the investor can also defer withdrawing from the NPS scheme after attaining 60 years of age. Deferment is allowed for 10 more years till the investor attains 70 years of age.

Process of Withdrawing from the NPS Scheme

 

process of withdrawing from the nps scheme - all information about nps scheme

 

To withdraw from the NPS scheme, you would have to follow a process which is as follows –

 

Fill up a withdrawal form and submit it to the POP with your documents. The documents include the following

  • Your original PRAN card
  • A cancelled cheque
  • Attested photocopies of your proof of identity and address

Once the documents are submitted along with withdrawal application, they would be verified by POP
After verification the documents are forwarded to the Central Recordkeeping Agency (CRA) and NSDL
The withdrawal claim would be registered by the CRA which would send you the application form and the list of documents required to be submitted
After you complete the formalities, the withdrawal application is processed by the CRA and you get the settlement of your NPS account.

Tax Treatment of NPS Contributions and Withdrawals

 

  • Tax implications on NPS investments

 

tax implications on nps investments - all you need to know about national pension scheme

 

NPS investments are tax-free in the hands of the investor for the contributions done to Tier I account. This means that you can claim a deduction on your taxable income for the investment done in the NPS scheme.

 

However, contributions done to Tier II account do not enjoy tax reliefs. They are taxable in the hands of the investor.

 

The tax benefits on NPS investments are available under three different sections. These are as follows –

 

Applicable sections Who can claim the deduction Limit of deduction available
80 CCD (1) Both salaried employees and self-employed individuals For salaried employees – up to 10% of the basic salary + DA

For self-employed employees – upto 10% of annual income

However, in both cases, the maximum limit of deduction available is limited to INR 1.5 lakhs which also includes deductions available under Section 80C

80 CCD (2) Salaried employees whose employer’s contribute towards NPS scheme Up to 10% of the basic salary + DA
80 CCD (1B) Salaried employees, self-employed individuals and ordinary individuals having an income Up to INR 50,000. This  is in addition to the limit of Section 80C and 80 CCD (1)

 

Thus, individuals can claim a maximum deduction of INR 2 lakhs by investing in NPS through Sections 80C, 80CCD (1) and 80 CCD (1B). Moreover, the employer’s contribution is allowed additionally as a deduction under Section 80 CCD (2).

 

  • Tax treatment of withdrawals from the scheme

 

tax treatment of withdrawals from nps scheme - all you need to know about nps scheme

 

In case of withdrawals, tax treatment depends on when the amount is withdrawn. Let’s understand –

 

Time when withdrawal is done Amount of withdrawal Tax treatment
When NPS matures and the investor attains 60 years of age 60% of the corpus No tax is levied on the lump sum withdrawal
40% of the corpus in the form of annuity Annuity payouts are considered to be an income. They are, therefore, added to the taxable income and taxed at the investor’s tax slab
When the investor dies Full corpus Completely tax free
Before the maturity of NPS, i.e. before attaining 60 years of age 25% of the corpus for specific needs Completely tax-free
20% of the corpus for other needs Completely tax free
80% of the corpus received in annuity Annuity payouts are considered to be an income. They are, therefore, added to the taxable income and taxed at the investor’s tax slab

 

Given these tax implications, NPS is considered to be an EET (Exempt, Exempt, Taxed) investment scheme where the investment is tax exempt, returns are tax exempt but annuity payouts are taxable.

Annuity Payouts Under the NPS Scheme

 

annuity payouts under the nps scheme - get all information about national pension scheme

 

Annuity means a series of payments which are done at regular periodic intervals at predefined rates and for a predefined period. Annuities, therefore, provide a source of regular incomes. Under NPS schemes, 40% or 80% of the corpus is payable in the form of annuity depending on when you exit from the scheme.

 

Annuity payouts ensure that you get a series of regular incomes after you retire to meet your lifestyle expenses. This way, NPS creates a retirement income and proves useful. Moreover, there are different options of annuity payouts which you can choose to receive depending on your financial requirements.

 

These options include the following –

 

  • Annuity payable for the lifetime of the investor at a uniform rate
  • Annuity payable for a guaranteed period (5,10 or 20 years) and thereafter payable for the lifetime of the investor at a uniform rate
  • Annuity payable for the lifetime of the investor at a uniform rate. On death of the investor, the purchase price is returned
  • Annuity payable for the lifetime of the investor where the annuity amount increases @ 3% on a simple interest  basis
  • Annuity payable for the lifetime of the investor at a uniform rate. In case of death of the investor, 50% of the annuity is payable to the spouse for his/her lifetime
  • Annuity payable for the lifetime of the investor at a uniform rate. In case of death of the investor, 100% of the annuity is payable to the spouse for his/her lifetime
  • Annuity payable for the lifetime of the investor at a uniform rate. In case of death of the investor, 100% of the annuity is payable to the spouse for his/her lifetime. After the death of the spouse, the purchase price is returned to the nominee.

 

Who Pays Annuities Under the NPS Scheme?

 

who pays annuities under the nps scheme - all information about national pension scheme

 

You can choose to receive annuity payouts from any of the insurance companies which are empanelled with PFRDA to pay annuities under the NPS scheme. Presently, the insurance companies empanelled with PFRDA to pay annuities include the following –

 

  • SBI Life Insurance Company Limited
  • Star Union Dai-ichi Life Insurance Company Limited
  • Life Insurance Corporation of India
  • Bajaj Allianz Life Insurance Company Limited
  • HDFC Standard Life Insurance Company Limited
  • ICICI Prudential Life Insurance Company Limited
  • Reliance Life Insurance Company Limited

 

So, understand the complete details about the National Pension Scheme before you choose to invest in it so that you can know exactly what the scheme promises and how it helps in tax planning.

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Investwell May 2, 2019 1 Comment

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