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Make post-retirement plans now!
Freny Patel in Mumbai | September 09, 2004 11:58 IST
Problem 1. India does not offer a social security system to its elderly like the developed countries. Today there are over 7.2 crore (72 million) people over the age of 60, according to the Ministry of Social Justice and Empowerment. The figure is expected to jump to 17.7 crore (177 million) by 2025.
Problem 2. The number of pink slips being handed out in various industries is increasing too, meaning frequent unemployment would be a way of life in future.
Problem 3. Mortality rate has improved and a lot more people are living well beyond their retirement age, and in some cases working years is less than the number of years lived after retirement.
The solution to all this? People need to start saving early and in the process create a handsome corpus for post-retirement life.
Today individuals save a maximum of Rs 10,000 per annum towards their pension plan. This is because of the ceiling on the tax benefit under section 80 CCC for pension plans. The industry has been pushing for the tax benefit to rise three-to-four fold, which would provide a higher monthly pension on retirement.
By saving from the age of 20-25 an individual will get a monthly pension of Rs 12,000 at the time of retirement if he's putting aside just Rs 10,000 every year.
Should he start from the age of 35, he would need to save Rs 45,000 per annum to retire on the same monthly sum. Unfortunately the tax structure today is skewed against pension savings and individuals are not encouraged to adequately provide for their retirement.
At current annuity rates, a 45-year old individual starting to stash away for his pension, would end up with a monthly annuity of just Rs 1,500.
Hardly enough to pay for his board and lodging, forget the rising medical costs, or that extra luxury he would have liked in his old age. Ideally he would need to save at least Rs 75,000 per annum at that stage (45 years) if he were to retire on a monthly sum of Rs 12,000.
It's not just medical costs alone. Even daily expenses like food, petrol and transportation end up costing more. A kg of potatoes used to cost just Rs 1.50 some years ago.
Today it is at Rs 8 and taking the current inflation rate, 10 years from now, potatoes could cost Rs 50 or more per kg. Similarly, petrol prices have equally shot up from Rs 17 a litre 10 years back to Rs 43 plus today, and could well rise to Rs 60 a litre in the none too distant future.
Pension plan is all about ensuring oneself financially against the risk of living too long -- a catch phrase used by all insurers.
It is about fund management, long-term savings, protection and annuity. And today it is an investment that offers taxpayers a direct tax deduction of Rs 10,000 from one's taxable income under section 80 CCC of the Income Tax Act. With a sum of Rs 10,000 invested in pension schemes, even at the highest tax bracket, this works out to a tax saving of Rs 3,150.
However, considering the high cost of living and falling interest rates, people ought to be saving far more than Rs 10,000 a year if they wish to retain their present lifestyles. Take the Life Insurance Corporation of India's Jeevan Suraksha pension plan.
A 30-year old paying Rs 10,238 every year for a term of 20 years will be entitled to a pension of just Rs 4,200 per month on retiring at the age of 50. LIC assumes an annual bonus rate of Rs 65 per Rs 1,000.
This is purely an illustration, which could vary depending on interest rates and investment strategies.
A pension plan also allows a policyholder to withdraw a certain percentage of the accumulated fund on retirement to take care of some large expenses.
Most of the private players -- ICICI Prudential, HDFC Standard Life, Tata AIG and Aviva Life -- have followed in LIC's shadow and offer a maximum withdrawal of 25 per cent of the accumulated corpus at the time of retirement. OM Kotak Mahindra Life is the only one to offer a maximum withdrawal of 33 per cent of the accumulated amount.
After withdrawal, policyholders have to buy an annuity plan that will provide him a monthly pension till the end of his days from the balance amount.
Open market option allows customers on maturity to buy an annuity product from any life insurance company. Should a policyholder die within the accumulating period, most life insurers return premium with interest, subject to a maximum of sum assured plus accumulated bonus to date.
How much annuity one should buy is not a decision one can take today. But one that can be made only on retirement, based on the corpus saved and the annuities rate prevailing at the time.
Customers can choose from various annuity options available including options like annuity for husband and wife, annuity with annual increment, annuity with return of purchase price and more.
During the accumulation phase, a customer can only decide how much he/she can contribute and afford to put aside for post-retirement needs.
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