Investments Post-Retirement

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Published: 08th October 2012
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Every retired person would love to maintain similar lifestyle as he/she had prior to retirement. Hopefully you have amassed a sizeable retirement corpus which may be held in some investment. Unless you intend to continue with some sort of work you will not add to your corpus but will withdraw from it to sustain your life. Now is the time to fine-tune your investment strategy to suit your specific needs. Broadly at this stage your investments should aid in achieving the following two important goals:

1. Keeping your home and maintaining your lifestyle

2. Paying for whatever care you may require

Your retirement corpus could be in the form of employer-sponsored benefits such as PF and gratuity or your personal investments in pension plans of insurance companies, PPF, NSC, shares, mutual fund and bank FDs. In the absence of sufficient pension you need to invest in financial products that give you guaranteed income every month all your life. At the same time you can allocate some portion of your corpus for capital appreciation.

Senior Citizens Savings Scheme (SCSS)
Senior citizens Savings Scheme is a savings scheme of India Post for seniors aged 60 years and above. Retired individuals above 55 years of age on superannuation or voluntary retirement can also contribute to the scheme provided their income is from retirement benefits. Interest at the rate of 9% per annum is paid on a quarterly basis. One can link SCSS account to an RD account through SB account in the same Post Office and earn an interest of approximately 10.5%.

Minimum investment is Rs 1000 and maximum investment is Rs 15 lakhs. Maturity period is 5 years extendable up to 3 years. Prematurity closure of account is permitted at a charge. Deposits of up to Rs 1, 00,000 in SCSS is deductible under section 80c of the Income Tax Act. Interest payouts are taxable as per applicable tax slabs. TDS is applicable.

The account can be opened singly or jointly. The joint account holder must be the spouse on whose age limit there is no restriction. Nomination facility is also available. Account can be opened in any designated Post Office or a Public Sector Bank.

SCSS is a worthwhile option to invest a portion of your retirement savings for regular income taking into consideration the safety, interest rate and tax benefit available.

Post Office Monthly Income Scheme (POMIS)

Post Office Monthly Income Scheme is another savings scheme offered by designated Post Offices in India. It is suited for elderly and conservative retirees who want the assurance of guaranteed returns without high risk.

Interest payments are made every month from the date of investment at the rate of 8% per annum. One can link POMIS account to an RD account through SB account in the same Post Office and earn an interest of approximately 10.5%. The maturity period is 6 years. Premature closure of account is permitted with a charge.

An account can be opened by any individual singly or jointly. The minimum amount of investment is Rs 1500 while the maximum amount is Rs 4.5 lakhs for a single account and Rs 9 lakhs for a joint account. Apart from the annual interests a bonus of 5% is provided on maturity. On maturity one can opt to let the deposits remain in the account for up to two years in which case interest rate applicable on a savings bank account will be earned.

There is no tax exemption for deposits in POMIS. Tax charged on interest earned and bonus received will be as applicable under tax slab of the depositor. No TDS is applicable.

Monthly Income Plans (MIPs) of Mutual Funds

Similar to monthly income plan of Post Offices mutual funds offer MIPs where an investor invests an amount in the fund and earns interest on it. The big difference is that returns are not assured although they are higher than one would obtain on an FD or a Post Office scheme. These funds invest up to 25% in equities and the rest is invested in debt instruments like commercial paper, certificate of deposit, treasury bills, etc. While the equity investment boosts returns debt investment ensures stability of returns.

Different plans have different minimum and maximum amounts of investment. There is no maturity period for investments. There is medium risk associated with MIPs because their returns are linked to markets to the extent of percentage of equity investment and interest rate fluctuation. Besides paying dividends is not mandatory for mutual funds and there have been instances of dividends not being paid for most of the year during rough periods like in 2008. Nevertheless many MIPs have given returns in the range of 11% to 13% on a 5 year average (as in Aug 2011).

Tax efficiency can be achieved with MIPs if you ensure not to withdraw before one year of investment. Tax on short term capital gain (investment less than a year) is 30% and on long term capital gain (investment more a year) is 10%. Dividend distribution tax is 12.5%.

It may be worthwhile to invest a portion of retirement corpus in an MIP after you’ve invested in other secure investments if you don’t want to lose on higher returns. Choosing a quarterly return offers more secure return over monthly return as the fund would have to pay out dividend only 4 times a year. It must be remembered that apart from dividends, your corpus will also appreciate in value over time.

Annuities

An immediate annuity plan of an insurance company pays regular annuities for a lump sum amount invested by you. There are four life insurers that offer immediate annuities presently namely Bajaj Allianz Life, HDFC Standard Life, ICICI Prudential Life and LIC.

Premium paid is also called as purchase price. The rate of return on various annuity plans are assured and fixed. It depends on your age, plan selected and how much the insurer is committing to pay. Available annuity payouts can be broadly classified into four as follows:

1. Life annuity without return of purchase price



This type gives you monthly income for life but does not return the principal on your death. This is suitable for people with no spouse and not wanting heirs to receive the annuity amount.

2. Life annuity with return of purchase price



This one gives monthly income throughout your life and on your death returns the principal to your nominee. This one may be right for you if you wish to leave behind some assets for your spouse or heirs.

3. Dependent spouse plans



These plans are suitable for those having a spouse dependent on them. There are two types of plans under this. The first one pays the spouse for a specified number of years, on your death. The second one pays the spouse for life, on your death.

4. Inflation-adjusted plans



In this plan the monthly payout increases every year by a pre-determined amount but the rate of return is very low.

The rate of return is highest for life annuity without return of purchase price and lowest for inflation-adjusted plans going in that order. Tax exemption of Rs 1, 00,000 is allowed on premium paid on annuities under section 80 C. Annuities received are taxable according to tax slabs of the individual.

Annuities are not great investment options considering the fact that the rate of return on lifetime annuity plans is 8-9% per annum but they do not return the purchase price. Other annuity plans that do return purchase price have rates of return as low as 3.5-5% per annum.

Investment for Capital Appreciation
Rtrd- Managing Your Investments >> Managing Your Investments >> Investment for Capital Appreciation
Not all your entire retirement corpus has to invested in ‘safe’ investments. After you have ensured you have devoted sufficient funds to generate periodic income you can venture into equities. For your age up to 15% of investments can be made in equities. Equity is one way to ensure your investments beat inflation in the long term, say 7-15 years. It is pointless to keep all your money invested in an FD and find after 10 years that the interest payments aren’t even sufficient to make ends meet.

One cannot expect to live the rest of retired life on interest earned from savings schemes. One reason is as mention above that debt instruments do not catch up with inflation. The second reason is that one might have to cut off portions from investments for unforeseen reasons. Unless the principal investment gains in value the payouts such as interest or dividend will not be sufficient to meet your needs. This means one cannot avoid exposure to other investments like equity if the long term of 5 years or more is being considered.

Mutual fund

Mutual funds are excellent options for retirement investment. An equity based fund will beat inflation and give better returns than debt based funds. One can invest in ELSS (equity linked saving scheme) which offers returns more than debt funds and investment up to Rs 1, 00,000 is tax free under section 80 C. There is a lock-in period of 3 years. Long term capital gains and dividends are tax free under the current tax structure. Investments have no maturity period and there is no upper cap on entry age.

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