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Plan your retirement

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A well-thought-out pension scheme is an integral part of your security cover, says Priya Desai

Financial security during the sunset years is imperative, and a pension has been considered the ideal way of ensuring it. Even today, many silvers who have served in government offices, public-sector undertakings, banks and even in the corporate sector enjoy the benefit of a pension. With increased longevity over the past few decades, the fiscal burden on the Government has mounted, forcing it to introduce changes to the pension system. A pension no more remains a rightful benefit after retirement but has been turned into a contributory facility for all those who joined government service after 2004.

The National Pension System (NPS) was born in 2009. Seven years later, it’s no more a toddler. Whether its baby steps have transitioned into giant strides is a question that eludes an easy answer.

Social security

With the silver population on the rise, social security is one of the prime concerns of governments in developed countries. It won’t be an exaggeration to say that social security in India falls in the private and family domain. It is also true that most people are ignorant of the need to build a social security net for themselves. An often-raised question relates to the timing of social security provisioning. Given the compounding power of money, it is ideal to start weaving a financial security nest at a younger age. However, it won’t be late for even the middle-aged and people nearing retirement to join pension plans. At the end of the day, it’s important to lend an assured basis to the income flow in the twilight years. Given the spectrum of choices available, it would be prudent to compare various pension plans.

An array of options

With competition being the buzzword in the financial world, pension plans are not an exception. Life Insurance Corporation (LIC) and State Bank of India (SBI) are at the forefront of public-sector organisations that vie with private-sector companies such as Kotak Life, Sahara Life, etc. If you are looking for companies with foreign participation, there are many to choose from: Birla Sun Life, Tata AIG, Bharati AXA, ICICI Prudential, among others.

Mutual funds also have retirement products. Recent entrants include Reliance Retirement Fund and HDFC Retirement Savings Fund. While NPS has become mandatory for government employees joining after January 2004, it’s optional for the private and unorganised sectors.

Different features

Each retirement product comes with some inbuilt features. An investor needs to scrutinise the pros and cons carefully. For instance, an annuity is an inbuilt feature of pension plans from insurance companies as well as the NPS, but with a difference. In the case of the former, a lump sum payment is made to buy an annuity. A few numbers illustrate the vastness the NPS hopes to cover. The number of silvers in India—60 years and above—has seen an increase of 107 per cent from 1991 to 2016. Subsequently, the percentage of silvers is projected to increase from 8.9 per cent in 2016 to 13.3 per cent by 2026. This great sea of silvers is the potential subscription base for the NPS.

The Pension Fund Regulatory and Development Authority (PFRDA) is the arm of the Government that promotes income security among silvers. NPS is open to Indian citizens between the ages of 18 to 55. Seven entities selected by the PFRDA are designated fund managers, running various plans comprising equity, government securities, and corporate bonds.

NPS Scorecard: Comparison of fund manager performance
TIER I: Equity Plans
Fund NAV Returns (%) Assets (₹ cr)
3-Month 6-Month 1-Year
HDFC Pension Fund 16.53 6.38 18.42 10.08 235.4
ICICI Prudential Pension 22.88 5.27 17.71 9.80 350.2
Kotak Pension Fund 21.35 6.74 18.84 11.67 61.9
LIC Pension Fund 15.29 5.21 17.91 9.34 150.0
Reliance Capital Pension 21.33 5.33 16.37 8.59 45.7
SBI Pension Fund 19.62 6.18 19.15 11.10 720.1
UTI Retirement Solutions 22.81 5.26 19.75 11.47 85.2
Nifty 50 Index 4.31 15.25 6.36
TIER II: Government Bond Plans
Fund NAV Returns (%) Assets (₹ cr)
3-Month 6-Month 1-Year
HDFC Pension Fund 14.77 7.28 10.74 14.82 185.5
ICICI Prudential Pension 19.94 7.45 10.80 14.91 281.6
Kotak Pension Fund 19.83 7.61 11.10 15.80 63.0
LIC Pension Fund 15.20 7.32 10.63 14.34 100.0
Reliance Capital Pension 19.34 7.47 10.85 15.17 46.3
SBI Pension Fund 21.41 7.24 10.66 14.91 950.8
UTI Retirement Solutions 19.51 6.95 10.29 14.40 82.3
CCIL All Sovereign Bond – TRI 6.39 9.63 13.78
TIER III: Corporate Debt Plans
Fund NAV Returns (%) Assets (₹ cr)
3-Month 6-Month 1-Year
HDFC Pension Fund 14.70 5.70 8.13 12.99 149.3
ICICI Prudential Pension 22.62 6.03 8.36 13.24 242.8
Kotak Pension Fund 22.58 6.22 8.53 13.70 47.2
LIC Pension Fund 14.78 5.52 7.98 13.09 92.4
Reliance Capital Pension 20.25 5.38 7.66 12.43 32.0
SBI Pension Fund 22.72 5.83 8.14 13.02 504.6
UTI Retirement Solutions 20.58 5.65 8.00 13.15 54.0
CCIL Bond Broad – TRI 5.19 8.03 12.52
Returns as on 7 Oct 2016. Assets as on 31 Aug 2016. Source: Value Research
As appeared in The Economic Times; 10 October 2016

Investors may select their own plan mix and fund manager. They also have the option of switching fund managers once a year, if they so desire. At 60 years (i.e. on maturity), 40 per cent of the accumulated pension corpus must be invested in annuities arranged via a life insurance company. This results in a flow of fixed income during the investor’s retirement years.

NPS asset classes

The modus operandi of the NPS revolves around providing three choices. Three asset classes provide a mix of options:

  1. The first option (E) results in high investment exposure in equity (mainly index funds) capped at 50 per cent, attracting investors with an appetite for higher risk.
  1. The second option (C) denotes high exposure in fixed-income instruments like liquid funds, corporate debt instruments, fixed deposits and infrastructure bonds that are aimed at investors who don’t enjoy high stakes.
  1. The mix of pure fixed investment products (G) offers low returns at low risk. Active Choice Life Cycle Fund is for investors who do not pick an option mix. In such cases, the fund manager will decide the asset allocation from the three above classes based on the investor’s age.

Mutual funds

Retirement products from mutual funds have been around for some time now. Being mutual funds, they enjoy income tax benefits under 80C. Features and tax benefits accruing to these schemes are presented in the table, clearly indicating the differences in tax benefits enjoyed by them vis-à-vis other retirement plans.

Apart from the Employees’ Provident Fund route available to salaried employees, there are a few other optional retirement plans.

Some are offered by mutual funds and others are offered by insurance companies.

Make sure you read their product features before deciding which one you’d like to opt for.

  Reliance Retirement Fund Franklin India

Pension Plan

UTI Retirement

Benefit Pension Plan

Insurance-based pension

plans (traditional)

Insurance-based pension

plans (market-linked)

National Pension System


Mutual fund-linked retirement

plan (proposed)

Large-cap diversified equity




Wealth creation scheme:

65-100% in equities,

in debt income generation


5-30% in equities,

70-95% in debt

0-40% in equities,

60-100% in debt

0-40% in equities,

60-100% in debt

Debt Debt / hybrid / equity


E class (equities);

C class

(corporate bonds);

G class

(government securities)

Growth option of existing

diversified equity funds

65-100% in equities


Lump sum

₹ 5,000; SIP:₹ 500

₹ 500 ₹ 500, up to age 52;

₹ 10,000 after that

₹ 2,000 –

₹ 25,000

₹ 2,000 –

₹ 25,000

₹ 6,000

(per annum)

NA ₹ 500 –

₹ 1,000

Income tax


Section 80C benefit* Section 80C


Section 80C benefit* Section 80CCC benefit** Section 80CCC benefit** Section 80CCD# Deduction on investment up to

₹ 2 lakh (including section

80C limit)

Tax on


Mutual fund capital gains tax rules apply Mutual fund

capital gains tax rules apply

Mutual fund capital gains tax rules apply Commuting up to 1/3rd

maturity corpus is tax-free; rest is annualised**

Commuting up to 1/3rd

maturity corpus is tax-free; rest is annualised**

Up to 60% of maturity

corpus taxable as per income

tax rates**

Nil Long-term capital gains tax is nil


5 3 Nil Vesting period typically starts at age 40 Vesting period typically

starts at age 40

Up to age 60 5 Nil
*Deduction up to ₹ 1.5 lakh; **Deduction up to ₹ 1 lakh; # up to 10% salary of basic – dearness allowance,

subject to overall limit of ₹ 1 lakh; NA – not available

Source: Mint Research

These plans aren’t necessarily advantageous compared to the tax-saving mutual funds (ELSS funds) and carry a higher exit load if redeemed before the age of 60, in addition to a five-year lock-in period. However, these products offer a 100 per cent equity choice and do not involve compulsory buying of an annuity as in the case of the NPS or pension product from insurance companies. In addition, the cash flow needs can be matched with a tax-efficient systematic withdrawal plan. Investors can prepare the retirement product basket suitable to their income flow requirements by maximising the benefits offered by various schemes.

Plan now, plan right

It’s important to feel concerned about a healthy income flow in silver years. No retirement plan offers a foolproof guarantee of a stable income flow. Each has its pros and cons, simply because there is no standardised inflation-linked pension facility that exists for today’s silvers above 65 years of age.

Most existing plans are market-linked, and carry a risk profile. The timing of investment and an assessment of a risk-reward mix based on the requirements of funds flow will determine the quotient of benefit from a given pension plan. This involves an asset allocation exercise; given the risk-reward component, placing all the eggs in a single basket—whether equities, bonds, fixed deposits, mutual funds—isn’t a wise choice.

The current disruptive financial environment poses many challenges in planning a stable income flow over an extended period of retired life. In such a volatile scenario, pension schemes need to be looked at carefully, with the help of a financial advisor, to provide some stability to the flow of income. A well-designed pension plan is an important building block in a prudent retirement plan.

The author is an economist based in Mumbai

Photograph by iStock
Featured in Harmony Celebrate Age Magazine
November 2016