Reacting to the new entrant

Govt is set to launch an ambitious pension scheme from April 1 to provide social security to an estimated 80 million people. We look at how this scheme can help you and analyse the existing pension options.

 

Narayan Krishnamurthy        Print Edition: March 19, 2009

Like most of us, the 25-year old, Mumbai-based Chintan Chauhan is worried today. But, unlike most of us, he is the model poster boy for financial planners. The reason: he started early with investing, financial planning and, most importantly, retirement planning. “I have some idea about what I want in life and have worked backwards to buy instruments that suit my risk profile and will help me get there,” he explains. Elsewhere in India’s financial capital, 31-year-old Sachin Shirke has been saving diligently for his retirement. “I bought a pension plan over and above my Provident Fund deductions so that it results in a sizeable monthly income later,” he says confidently.

“Starting early is helpful, as it disciplines one to make regular contributions and gain from longterm investing and savings,” agrees Shyamal Saxena, chief marketing & distribution officer, Bharti AXA Life. Chauhan and Shirke are from different backgrounds but they have one thing in common: they care about their future. However, their comfort levels will dip a bit in the near future thanks to the launch of the New Pension Scheme (NPS) on 1 April this year. NPS is bound to worry people about what they should do with their existing plans.

The reasons are many. Compared with pension products offered by the existing players, mostly insurers such as LIC, ICICI Prudential, HDFC Standard Life and Reliance Life Insurance, NPS’ costs will be much lower for members. The new scheme is more dynamic as it can offer its fund managers a greater flexibility in managing the corpus (which could be as large as Rs 20,000 crore in five years), and it will provide higher security as it is backed by the government. If all this turns out to be true, after Parliament passes the requisite legislation, you and I are likely to rethink our retirement strategies.

Accumulation options for Pension 
Which one is for you?
Saving option
Advantages
Disadvantages 
Suitable for
Pension plan from insurers
- Flexible, with active/passive participation options.
- Offers tax incentive on accumulation and growth.
- Returns are not guaranteed.
- High built-in charges during initial years.
Those in the lower tax bracket.
Insurance policies
- Offers EEE tax incentive.
- Comes with additional cover options to work as insurance, savings and investment.
- One is betting on survival on maturity.
- Flexibility can lead to misuse for any financial need.
Those in the higher tax bracket.
Mutual funds
- Regular and long-term savings.
- High liquidity.
- Capital erodes in a falling market.
- No guarantees.
Those in higher tax bracket who want income with growth.
Bank, small-savings deposits and Senior Citizens Savings Scheme
- Creates stable and regular income.
- Wide range of tenures can help create income ladder.
- Interest on payout is taxed.
- Locks you to an interest rate that prevents you to gain from a rise in interest rates.
Those who want regular income in the short or medium term.
Who sells what

Insurers:
All life insurance players like LIC, HDFC Std. Life, Reliance, Aviva, ICICI Pru and Kotak offer accumulation retirement plans with/without life cover. Allow a minimum Rs 6,000 annual investment with tax deduction under Section 80C.

Mutual funds:
UTI Retirement Benefit and Templeton India Pension Plan offer structured retirement funds with 40:60 equity-debt ratio. Give lump sum and systematic withdrawal option on exit.

Post office:
Sells National Savings Certificates and monthly income plan with fixed return on maturity.

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