There are quite a few options solely meant to take care of one’s post-retirement needs. Each of these products have their own unique features that one should be aware of. Some of the investment options – pre and post retirement options which may come handy are being discussed here.
Pre-Retirement Investment Options
New Pension Scheme (NPS)
New Pension Scheme is a good retirement investment option. NPS is open to all but, is mandatory for all government employees.
An investor can deposit a minimum of INR 500 per month or INR 6000 yearly.
There is no direct tax exemption during the time of withdrawal as the amount is tax-free as per Tax Act, 1961.
This scheme is a risk-free investment being backed by the Government of India.
Bonds are one of the most popular retirement investment options. A bond is a debt security where the buyer/holder initially pays the principal amount for buying the bond from the issuer.
The issuer of the bond pays the holder an interest at regular intervals and also pays the principal amount at the maturity date.
Bonds provide good 10-20% p.a.-rate of interest.
There is no tax applicable on bonds at the time of investment.
Non Convertible Debentures (NCDs)
Non convertible debentures are fixed-income instruments which are issued by high-rated companies.
Like traditional corporate FDs, NCD too is a fixed-income investment with a specific term and interest income.
NCDs give higher returns (8%-9%%), compared to corporate FDs, bank FDs and Government bonds (max 8%).
Investors in the 10% and 20% tax slabs find NCDs lucrative. This is because one can earn more if the tax bracket is low.
4. Exchange Traded Funds (ETFs)
An Exchange Traded Fund (ETF) is a type of investment that is bought and sold on stock exchanges. It holds assets like commodities, bonds, or stocks.
· An exchange traded fund is like a mutual fund
· Unlike a Mutual Fund, ETFs can be sold at any time during the trading period.
· ETFs helps to build a diverse portfolio.
Equities are ideal for long-term investments and are one of the best retirement investment options. An equity fund is a type of Mutual Fund that invests mainly in stocks. Equity represents ownership in firms (publicly or privately traded) and the aim of the stock ownership is to participate in the growth of the business over a period of time.
Amount invested in Equity Funds is regulated by SEBI and they frame policies & norms to ensure that the investor’s money is safe.
6. Real Estate
It is the most preferred retirement investment options amongst investors. It is an investment made in the real estate, i.e. house/shop/site, etc. It gives good stable returns. To make an investment in real estate, one should consider good location as the key point.
Post Retirement Investment Options
A systematic withdrawal plan is most commonly used for retirement to augment a retiree’s income.
An SWP allows investors to withdraw a fixed amount regularly by redeeming mutual fund units from the initial investment.
Systematic withdrawal plans can be setup for withdrawals from nearly any type of investment vehicle in the market.
Common investment avenues used for SWPs include mutual funds, annuities, brokerage accounts etc.
Retirees prefer the dividend option as it gives them intermittent cash flows. Dividends in mutual fund schemes excite investors. In fact, many of them apply just before the declaration date to earn that dividend.
Dividends received from all mutual fund schemes be it equity, debt or hybrid is tax-free in the hands of the investors.
In the case of debt funds, the fund house pays a dividend distribution tax of 28.84% which includes surcharge and cess.
In an equity mutual fund, there is no dividend distribution tax.
An annuity is a retirement product that gives one pension for life. In India they are sold by life insurance companies and one can choose from a range of options available currently.
An annuity guarantees regular payments for life after an individual invests a lump sum.
One buys an annuity product at a prevailing rate, which gets locked. Thus payouts are fixed and guaranteed.
There are about 7-10 different pension options, including pension for lifetime for self, after death to spouse and post that the return of corpus to heirs.
Pension plans of life insurance companies require one to annuitise at least two-thirds or 66.67% of the corpus on maturity. The remaining one-third can be taken as lump sum.
Senior Citizen Saving Schemes (SCSS)
The Senior Citizens’ Saving Scheme (SCSS) is a must-have in the retiree’s investment portfolio.
An SCSS is designed for retired people who are above 60 years old.
SCSS is available through certified banks as well as the network post offices spread across India.
This scheme (or SCSS account) has a five-year tenure, which can be further extended by three years once the scheme matures.
The upper investment limit is Rs 15 lakhs and one may open more than one account.
The capital invested and the interest payout, which is assured, has sovereign guarantee.
Investment in SCSS is eligible for tax benefits under Section 80C and the scheme also allows premature withdrawals.
The current post office SCSS interest rate 2018 is 8.3% per year. And, the quarterly interest of SCSS is payable on 1st working day of April, July, October and January.
Post Office Monthly Income Scheme (POMIS)
This is the monthly income scheme from the post office of India. If an investor is looking at a guaranteed regular monthly income, this is a good option.
The minimum investment for POMIS is Rs 1,000 and the maximum investment goes up to 4.5 lakh for a single account and for a joint account the investment options limit is up to nine lakh.
The lock-in period for Post Office MIS is 5 years. You can withdraw the invested amount when the scheme matures or reinvest it.
As a fixed income scheme, the money invested is not subject to market risks and is quite safe.
One can start a nominal initial investment of Rs. 1500. As per affordability, one can multiply this amount.
This does not fall under Section 80C and the income is subject to taxation. On the other hand, it has no TDS either.
The investor can move the funds to an RD (recurring deposit), which is a feature Post Office has added recently.
Instead of going to the post office each month, the interest can be directly credited to the savings account of the same post office.
6. Reverse Mortgage
As a part of the post- retirement investment options, a reverse mortgage is a good option for senior citizens who need a steady flow of income.
In a reverse mortgage, money is provided by lender in lieu of the mortgage on their homes.
Any house owner 60 years of age (and above) is eligible for this.
Retired people can live in their property and receive regular payments, until the death.
The money receivable from the bank will depend on the valuation of property, current price and the condition of the property.
7. Bank Fixed Deposits
A bank fixed deposit (FD) is a popular choice with the retirees. The safety and fixed returns and the ease of operation make it a reliable avenue.
It enables money to be deposited with banks for a fixed maturity period, ranging from 15 days to five years (& above). Thus, unlike SCSS and POMIS, bank deposits provide flexibility in terms of tenure.
During the time of maturity, the investor receives a return which is equal to the principal and also the interest earned over the duration of the fixed deposit.
For those looking to save tax, the five-year tax saving bank FD could be a better option. The investment made here qualifies for Section 80C tax benefit. However, such a deposit will have a lock-in of five years and early withdrawal is not possible.
Tax-free bonds, although not currently available in the primary market, can also feature in a retiree’s portfolio.
They are issued primarily by government-backed institutions such as Indian Railway Finance Corporation Ltd (IRFC), Power Finance Corporation Ltd (PFC), National Highways Authority of India (NHAI), Housing and Urban Development Corporation Ltd (HUDCO), Rural Electrification Corporation Ltd (REC), NTPC Ltd and Indian Renewable Energy Development Agency, and most carry the highest safety ratings.
One may buy and sell them on stock exchanges as they are listed securities.
They are long-term investments and mature after 10, 15, 20 years.
The interest is tax-free therefore there is no Tax Deducted at Source (TDS) too.
Liquidity is low in tax-free bonds.
They usually offer annual and not monthly interest payouts.
Retirement planning varies with each individual depending on their needs, requirement and risk capacity. With the above diverse retirement investment options, one would definitely find instruments matching their goals and objectives. And, there is no one single investment that can be called the best, a combination of more than one or many will serve the purpose better. An individual should be able to choose the right investment options by knowing in-depth details about it.
And, for a healthy, wealthy and peaceful retired life, it is very much necessary to start investing from now, from today!