Photo courtesy Andrea Piacquadio.
Individuals start planning for retirement during the time when they are earning. Some may wish to enjoy life and start saving late while others start saving from the time they start earning. Besides this, the savings may also depend on the family responsibilities a person has which may be in form of duties towards their parents or even siblings. When a person gets married they have their own family responsibilities and many send their children to study abroad. The amount that a person saves for their retirement depends on several factors. If a person is frugal and plans and spends money wisely they can have a good corpus for retirement and lead a stress-free life. There are many investment options for retired people and some of them are-
Senior Citizens Saving Scheme (SCSS)-
An individual above the age of 60 years can open an account in the senior citizen saving scheme (SCSS). The minimum deposit is Rs 1000 and the maximum limit is Rs. 15 lakh. The interest payable is 8 % per annum. Investment under the scheme qualifies for the benefit of section 80C of the Income Tax Act. Interest is payable on a quarterly basis and if not claimed by an account holder, such interest will not earn any additional interest. The account can be closed 5 years after the date of opening but the account holder may extend the account for a further period of 3 years by filling out the prescribed form. The account may also be prematurely closed after opening but if closed before 1 year; no interest will be paid and if any interest is paid will be recovered from the principal; if the account is closed after 1 year but before 2 years from the date of opening, an amount equal to 1.5% will be deducted from principal amount; and if closed after 2 years but before 5 years an amount equal to 1% will be deducted from the principal amount.
Pradhan Mantri Vaya Vandana Yojna (PMVVY)-
The Pradhan Mantri Vaya Vandana Yojna is a government pension scheme for senior citizens managed by the Life Insurance Corporation of India. It provides an assured return of 8% for the full policy term of 10 years. The scheme offers loans up to 75% of the purchase price after 3 years and allows premature exit for the treatment of critical illness in which case 98% of the purchase price is refunded. Senior citizens above the age of 60 years can avail of the scheme. There is no age limit and the investment limit is Rs. 15 lakhs per senior citizen. The mode of the pension payment is monthly, quarterly, half-yearly & yearly. On the death of the pensioner during the policy term of 10 years the purchase price is paid to the beneficiary. On survival of the policyholder to the end term of 10 years purchase price along with the final pension installment is payable.
The RBI bonds may be held by a person in their individual capacity or joint basis, on behalf of a minor by a father, mother, or legal guardian, or by a Hindu Undivided family. The maturity period is 7 years from the date of issuance and the bonds have to be in the electronic form held in the bond account ledger. The minimum limit for investment is Rs 1000 and in multiples of Rs 1000 and there is no maximum limit. Interest is payable semi-annually from the date of the issue of bonds.
The RBI bonds are non-transferable (transferability is limited to the nominee in case of death of the holder) and the income from bonds is taxable. These bonds are not tradable in the secondary market and are also not eligible for collateral to avail of loans. It is mandatory for investors to provide bank account details to facilitate payment of interest. The RBI floating rate bond carries a 7.35% interest rate.
National Pension Scheme-
The National Pension Scheme (NPS) is a voluntary retirement savings scheme that allows individuals to make contributions towards planned savings so that they can secure their future in the form of a pension. A citizen of India whether resident or non-resident can open an account and the applicant should be between 18- 70 years of age as of the date of submission of the application. The NPS has very low fund management and administrative charges and is considered the world’s lowest-cost pension scheme.
The scheme is portable and the applicant can operate an account from anywhere in the country. All the applicant has to do is open an account with any one of the POPs and get a PRAN (Permanent Retirement Account Number). The employed individuals enjoy tax benefits on their own as well as employer contributions. The self-employed are also allowed tax deduction up to 10% of the gross income under section 80 CCD(1) with an overall ceiling of Rs. 1.50 lakhs and for additional contribution subject to a maximum of Rs 50,000 under section 80 CCD 1(B).
The individual can contribute the amount through cash, cheque, demand draft, or Electronic Clearing System (ECS) at his/her chosen POP-SP. However, for cash transactions exceeding Rs.50000/- they need to submit a copy of the PAN card.
Under NPS, the money invested depends on the individual’s choice. NPS offers a number of funds and multiple investment options to choose from. The investment options are-
Asset Class E –
Investments in equity market instruments.
Asset Class C–
The scheme invests in fixed-income instruments other than Government securities.
Asset Class G –
Invests in Government securities.
Asset class A:
Investment in Alternative Investment Schemes including instruments like CMBS, MBS, REITS, AIFs, InvIts, etc.
Upon completing the age of 60 years by individuals at least 40% of the accumulated amount has to be utilized for purchasing an annuity that provides for a monthly pension and the balance is paid as a lump sum. The person has got an option to defer the withdrawal of a lump sum till the age of 75 years. In case of the unfortunate demise of the individual, an option is available to the nominee to receive 100% of the NPS pension amount in a lump sum.
An individual can invest their money in the fixed deposit offered by the banks and the NBFCs for a specified period of time and at a predetermined interest rate. It is a safe investment option that guarantees consistent interest rates, different interest payment options, and better interest for senior citizens. There is an income tax deduction as applicable. The fixed deposit may be for a period of a few days to a number of years depending on the bank.
Interest rates remain unchanged during the tenure of the fixed deposit which offers protection from volatility as compared to market-linked instruments. FD tenure can be selected according to the needs and knowing the maturity amount can let individuals plan for future requirements. Investment can be in a lump sum or monthly installments and it is easy to redeem the amount in case of an emergency. A loan can also be availed against an FD, and a person can take an overdraft against the FD and pay interest only on the amount they utilize and the rest of the FD amount can continue to earn interest.
Systematic Withdrawal Plan-
If the investor wants to have a higher rate of return and their money last for a longer time they can invest in mutual funds. In a systematic withdrawal Plan or SWP, the investors can withdraw a fixed amount at regular intervals like monthly, quarterly, or yearly from the investment they have made. The cash flow is generated by redeeming units from the mutual fund at fixed intervals. The investor has the flexibility to choose the amount, frequency, and date according to their requirement.
SWP provides regular income to the investor and they can stop anytime they want or can add more investment or withdraw an amount more than the initial SWP withdrawals. If the SWP withdrawal rate is lower than the returns generated by the fund the investor will have capital appreciation in the long term. If the investors don’t get the pension they can start SWP and generate their own income which can be like a pension. There is tax efficiency in SWP as compared to other investments.
Besides this, there is another investment option which is the dividend mutual fund which invests in companies that pay dividends. Though they provide a good dividend, sometimes when the going in the stock market gets tough these schemes may at times skip dividends. Therefore a systematic withdrawal plan is better than a dividend mutual fund.
A retired person can invest in any of the schemes mentioned above or a combination of these schemes. Before investing they should definitely take tax consideration and compare the post-tax returns. When invested wisely the money would last longer and the person will not have to financially depend on anyone in their old age.