Better security for sunset years

Better security for sunset years

This year might finally see the country’s first large-scale effort to build a system for its citizens’ social security.

Financial planners insist that you should pay for yourself before considering other financial goals. Essentially, this means setting aside a part of your income for retirement. All salaried employees are part of the mandatory Employee Provident Fund (EPF) system. Most rue the provident fund deduction from their salaries every month. If they had the faintest idea about where this money was going and how it was being utilised, they might look at the deduction with a kinder eye.

This is just what the Pension Fund Regulatory and Development Authority (PFRDA) aims to do. The voluntary NPS that will be open to the general public from April 2009 promises the necessary transparency and returns. What it does not offer, however, are the tax breaks. The contributions to this scheme will get tax exemption on investment and interest earned, but not on withdrawal. Considering that the scheme is long-term in nature, with the first exit age marked as 60 years, the tax burden as the corpus builds can change the nature of the inherent advantages.


• There will be five fund options for the scheme to invest in.

• There will be a unique PAN-like ID for the members.

• Real-time NAV of pension corpus will be available online and on phone.

• Tax incentives likely to bring the scheme on par with other tax savings.

• Long-term money in capital markets to strengthen the equity markets.

The benefits of the scheme are plenty. It will offer investors a choice of five fund options with the possibility of a life-stage fund, which will automatically allocate high equity in one’s early years and taper down towards debt with age.

In the early stages, six fund managers will be involved; competition will ensure that funds are invested in the best possible way. Unlike the same scheme for government employees, this fund will not have restrictions on the degree of equity exposure.

The fund options will take into account an individual’s risk appetite and will also offer switches between fund managers and funds, making it the first time that a pension scheme offers the contributors some control over their investments. The scheme will also use technology to beef up the back-end, making it unnecessary for investors to maintain physical records.

Other than NPS, the year will see plenty of retirement options from insurance companies and mutual funds. The annuity products currently available from insurance companies will also witness changes and could offer more options to investors.

After the Sixth Pay Commission recommendations, equity and debt markets will see more money invested for the long term. This will also open the limited bond-fund market. The government will be encouraged to start issuing longtenure debt paper. Most importantly, the pension business will provide long-term money, which the infrastructure sector needs.

With the Sixth Pay Commission recommendations being implemented, the Section 80C limit of Rs 1 lakh investment cap may come up for a review. This will be a booster for all products that qualify for tax benefits under this section, but pension products are likely to witness most of the action.

With PFRDA in place and the likelihood of the Pension Bill to be passed, people in both the organised and unorganised sectors can finally look forward to social security of some sort.

As the life expectancy of Indians increases, pension reforms are the need of the hour.