Lack of retirement planning options

January 13, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Unlike people in developed nations such as the U.S. and Europe, people in India are known for their conservative habit of saving. The need for regular income after retirement is a concern that haunts most Indians.

It goes without saying that banks and financial institutions should be designing products to tap this huge market. And yet the real situation is quite the opposite; there is a shortage of pension plans in India and those wanting to generate a retirement corpus have to depend on LIC.

We are also seeing young India investing heavily in home purchases. While this is very good from the asset build-up perspective, it should not come at the cost of the large corpus needed to provide liquidity on retirement.

The Annuity Game
The steps needed for this are quite simple. Keep adding small amounts every month/year throughout the working period and build a corpus large enough to purchase an annuity on retirement. This would be the most structured way of handling it and is more advisable than ad hoc lumpsum accumulation which may or may not fructify.

So then, what are the structured options available to the customer:

EPF – It is the best, safest and forced form of accumulation. The emphasis on “forced” is what makes this a very good bet. The flipside being that a large number of self-employed and semi-organised sectors do not have access to this route.

There are other options like PPF, NPS, SIP of mutual funds and more which can all be used to build that corpus. The absence of “forced” component is worrying here and these tools are largely used only as tax-saving tools. Individuals tend to use them to hit the tax exemption limits and not to achieve any planned corpus build-up.

Pension plans from insurance companies is another great way of saving for your retirement. Apart from building the retirement corpus, it provides a risk cover, has tax saving built into it and is semi-forced. Tough critics could argue that it comes with added costs. Add to it the forced purchase of an annuity at the end of the accumulation phase and this seems like a very attractive retirement planning tool.

All retirement plans have an accumulation phase and a vesting stage. At vesting, a policyholder can take 1/3rd of the money and has to mandatorily convert the remaining 2/3rd into annuities.

Because of the lack of sufficient plans or awareness, LIC has been the universal choice for most people while purchasing annuity. Because of this, more than 90 pct of all pension money lies with LIC, which is too much of a risk. In an effort to minimise the risk, the regulator has come up with new norms making it mandatory for customers to buy annuity from their own insurer.

While the regulator has framed rules which tend to protect the consumer and ensure deflocking of the entire pension portfolio, insurance companies are concerned about providing guaranteed returns and some finer points in the regulations which are part of the latest guidelines. Some of these concerns have been taken care of and some will need to be worked out. As a result, there is a temporary lack of pension options available in the market.

Customer’s Goal
Financial independence on retirement is something we all should plan for when young. It is crucial because of the way our society is transforming and the way our economy is growing. Putting this off for later will be at one’s own risk. Follow the Scout motto ‘Be Prepared’.

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