I, me, myself

Creating a retirement corpus yourself will help to have control over the funds better. Here's why.

Retirement, for some, may bring images of playing golf, spending time with grandchildren or pursuing a life of social service or any other passion. At the same time, it also leads to fears of failing health and depleting bank balance.

In your 20s and early 30s, retirement is too far in the distant future and very few people actually think about doing something about it. Most are busy planning for immediate future like marriage, children, first house, first car and so on. It is only after the age of 50, when most responsibilities like owning a house and children’s future have been dispensed with that the reality of the fast-approaching retirement starts sinking in.

At that point in time, one starts scrambling to create a retirement corpus with big investments in mutual funds or other instruments. Traditionally, most people do a rudimentary exercise of contributing to the employee provident fund and assume that this accumulated corpus, along with gratuity and superannuation (if any) will be sufficient during retirement.

The slightly more proactive take a step ahead and buy a pension plan as an additional cushion. Even the investments made in mutual funds and stocks in the early years are mostly to fund immediate needs like a house, children’s education, a car or travel.

Let’s look at the various ways of planning for your retirement.

• l Buying a pension plan from a life insurance company
• Creating your own pension plan

As far as buying a pension plan goes, a majority are deferred plans or deferred annuities. These plans are basically instruments where the objective is to first create a corpus. And only after this, the accumulated corpus is used to buy a pension plan (called immediate annuity) at the prevailing rates of return. However, this immediate annuity can be bought from a life insurance company at any point in time.

In other words, this effectively means that all you need to do is to accumulate a corpus through your own investments and simply use that to purchase an annuity plan. So going for a pension plan 20 or 30 years in advance does not make much sense. Here are some other reasons why you should avoid them

•  High costs: Between 10-20 per cent in the first year and 2.5 per cent from the second-third year onwards
• Unfavourable tax treatment: If you accumulate Rs 30 lakh through such a plan, only 33 per cent can be taken out as a lump sum and is tax-free. The balance has to be utilised to buy an immediate annuity and the pension received is tax-free.
• Lack of flexibility: In such plans, you have to compulsorily buy an immediate annuity, whether you need it or not.

Now, how to create one’s own pension plan, given the negatives in the existing pension plans? For starters, make a list of contributions that you are making towards a pension plan. There is EPF, voluntary contributions to provident fund, gratuity and superannuation. And follow these cardinal rules:

•  Never withdraw from EPF, unless there are no options and there is an extreme emergency
• Look at making voluntary contributions to EPF
• Look at PPF from a retirement planning perspective
• Ensure you own a residence
• Invest in stocks, diversified equity mutual funds, real estate and gold to ensure that you have created a sizeable corpus that will help you tide the long period of retirement
• During retirement, you always have options such as fixed deposits, senior citizens savings scheme and fixed maturity plans for your income requirements
• Besides these, there are options such as reverse mortgage

Understand that retirement planning involves building a corpus (accumulation) first and then, investing the corpus in the right instruments for returns. Using bundled products could just complicate matters.

The writer is director, My Financial Advisor