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Rediff.com  » Business » Buying retirement plans? These options can be of great help

Buying retirement plans? These options can be of great help

By Ashley Coutinho
January 06, 2015 11:17 IST
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In a country where there is no social security to speak of and life after retirement can extend well beyond 20 years, it is important to invest your retirement money in high-yielding asset classes.

 

Reliance Mutual Fund recently got the government nod to launch a pension plan.

This is the third such plan from a fund house. The first two — from UTI MF and Franklin Templeton MF — were launched 15 years ago.  

The fund house’s plan is the first to offer an aggressive equity option to investors.

Its Wealth Creation Plan option will invest anywhere between 65 per cent and 100 per cent of the corpus into equities and up to 35 per cent in debt and money market securities.

The two existing pension schemes,  Franklin India Pension Fund and UTI Retirement Benefit Pension Fund, invest up to 40 per cent in equities and the rest in fixed income instruments.  

“We intend to create wealth over the long term. The equity-oriented plan will be run like a balanced fund. It will be a diversified portfolio with 65-75 per cent in large caps and the remaining in quality mid caps,” said Sunil Singhania, chief information officer (CIO), equity, Reliance Mutual Fund.  

Reliance’s pension plan charges an exit load of one per cent if units are redeemed before the age of 60 years.

The scheme comes with a lock-in of five years. Experts believe while the three funds are not strictly comparable, equity-oriented pension plans are likely to outperform debt-oriented ones in the long term.

“The equity option is ideal for those starting their retirement planning at a relatively young age.

However, you should take this option only if you have the required discipline to stay invested for the long term,” said Hemant Rustagi, chief executive officer, WiseInvest Advisors.  

“In a country where there is no social security to speak of and life after retirement can extend well beyond 20 years, it is important to invest your retirement money in high-yielding asset classes.

One cannot rely on options such as EPF (Employees Provident Fund), PPF (Public Provident Fund) or provident fund to live through retirement. From this standpoint, pension plans with an equity component are a good option,” said a financial adviser.  

Tax benefits under such plans are currently restricted to Section 80C.

This means investors disciplined enough to stick for the long haul can also consider equity, linked savings schemes to plan for their retirement as they come with a similar tax benefit.  

Several other fund houses, such as SBI MF and Axis MF, have also filed offer documents with market regulator Securities and Exchange Board of India to launch pension funds.

These, too, could come up with equity-oriented plans. So, investors willing to wait a few more months might get more to choose from.  

Those in their 50s, though, are likely to better off going with Reliance MF’s Income Generation Plan or other plans that invest between five per cent and 30 per cent in equities and between 70 per cent and 95 per cent in debt and money market securities.

The good part is that investors can switch from a Wealth Creation Plan to an Income Generation Plan without paying an exit load.

Experts believe those who want to invest in debt-oriented plan, could be better off putting their money in either Franklin India Pension Fund or UTI Retirement Benefit Pension Fund, which come with a 15-year record. Both have given low double-digit returns for a 10-year period.  

Notably, pension plans from fund houses score over the National Pension System in two ways. One, at least 40 per cent of the corpus has to be compulsorily annuitised after attaining 60 years.

Two, the amount withdrawn, as well as annuity income, is fully taxable.

In the case of mutual funds, equity-oriented pension plans are completely tax-free if units are held for more than one year.

Debt-oriented pension plans are taxed at 20 per cent with indexation but this tax will be negligible or nil if the holding period is more than 10 years.

 

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Ashley Coutinho in Mumbai
Source: source
 

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