Retirement options. Retirement portfolio: Add some spice to your platter

National Pension System A market-linked retirement vehicle open to all, the NPS allows you to allocate between assets to build a long-term kitty. Professional fund management and low running costs are its biggest pluses. With a minimum investment of ₹1,000/year, it charges 0.25 per cent per transaction and 0.01 per cent towards fund management fee, far lower than the 2-3 per cent per annum charged by actively managed mutual funds.

Portfolio: Investors can select one or more of the eight pension fund managers (this may change with recent re-bids) to manage their money. They can also set their own asset allocation between Equities (E), Corporate bonds (C) and Government securities (G), with E capped at 50 per cent. Monthly portfolio disclosures and daily NAVs allow you to track your investments closely. If unhappy, you can change your fund manager or asset allocation through free switches.

Returns: They will vary with market conditions. But as of September 25, 2016, NPS plans managed to beat average returns for actively managed mutual funds across categories. NPS Equity (E) plans delivered a five-year CAGR of 13.03 to 13.96 per cent, against 12.9 per cent for large-cap equity funds. G-Sec plans earned 10.7-11.2 per cent, against 9.9 per cent averaged by gilt funds. The corporate bond plans earned 11.3-12 per cent, superior to 9.5 per cent from credit funds.

Liquidity: Recent relaxations have allowed NPS subscribers to withdraw up to 25 per cent of their contributions if they have completed 10 years, subject to end-use rules. Otherwise your investment is locked in until retirement age. But NPS rules require 40 per cent of final maturity proceeds to be compulsorily used to buy an annuity from an insurer.

Taxation: Most investors flocking into the scheme seem enamoured of the tax exemption of ₹2 lakh a year on their initial investment. But the tax treatment of returns is more important.

On this score, the NPS does not stack up well. Forty per cent of your final maturity proceeds are exempted from tax. But as 40 per cent is to be deployed in an annuity; the monthly income is taxable at your slab rate. The residual 20 per cent will be added to your income and taxed too. All this can put a sizeable dent in your effective returns, if you are in the top tax bracket.

Recommendation: While NPS scores high on returns, costs, and transparency, the restrictive rules on the use of final proceeds are a dampener. So is the fact that 60 per cent of your final proceeds may get taxed at slab rates, that too without indexation. But with the Centre keen to push NPS as the go-to option for all citizens, there’s a good chance of friendlier features over time.

Retirement plans from insurers Retirement products from insurers fall into two categories — traditional/guaranteed return plans and ULIPs. Both kinds of plans require you to pay a fixed annual premium for a chosen term (5, 10, 15 years or until 60) to give you a lumpsum at retirement (vesting) age.

Returns: Traditional pension plans deliver returns by way of ‘guaranteed additions’ to premiums or sum assured. With high costs and mostly-debt investments, effective returns seldom exceed 4-6 per cent. ULIPs have managed a 15 per cent plus CAGR. But both kinds of plans have a bevy of charges for premium allocation, policy administration and fund management, apart from mortality charges for the life cover.

Liquidity: Early exits are difficult in traditional plans, and surrenders are at a fraction of the premiums paid. In ULIPs, the investment is locked in for five years after which you may surrender it, at fund value minus nominal charges. But the big disadvantage is that these plans do not allow you to withdraw your accumulated wealth fully even at retirement age. You can only withdraw one-third as a lumpsum (commutation), and most use the rest to buy an annuity plan.

Taxation: Premiums paid under these plans are exempted under section 80CCC. At maturity, any commuted sum is tax-free, but the annuity received on a monthly basis is taxable.

Recommendation: ULIPs score over guaranteed plans as they may beat inflation. But insurance retirement products lose out due to lack of freedom to deploy your wealth as you like on retirement.

Retirement MFs While most equity or balanced MFs can double up as your retirement vehicle, the MF industry now offers a clutch of specialised retirement funds that are eligible for 80C benefits. CBDT-notified open end funds such as UTI Retirement Benefit Unit Plan, Franklin India Pension Plan, Reliance Retirement Fund and HDFC Retirement Savings Fund allow lumpsum or SIP investments to build a retirement corpus that you can use at 58/60.

Portfolio: The Reliance Retirement Fund offers two plans, a Wealth plan with a 65-35 equity-debt allocation and an Income generation plan with a 70-30 debt-equity mix. HDFC Retirement Savings offers three choices — an Equity Plan with 80-20 equity-debt allocation, a Hybrid Equity Plan with a 60-40 mix and a Hybrid Debt Plan, which parks a minimum 70 per cent in debt instruments. Both UTI’s RBUP and Franklin India Pension Plan are more conservative, with a 40 per cent allocation to equities, remaining in debt.

Returns: Franklin Pension Plan and UTI RBUP have delivered 10-11 per cent over 10 years. Both the Reliance and HDFC Retirement plans don’t have a long enough track record to evaluate. However, balanced equity oriented schemes from Reliance and HDFC MF have earned 15 per cent.

Taxation: Your investments in special retirement MFs are tax-exempt up to ₹1.5 lakh under section 80C. Final withdrawals are taxed just like normal MFs. So if you invest in an equity oriented plan, long-term capital gains are fully exempt from tax. For debt oriented plans, long term capital gains are taxed at 20 per cent, with indexation benefits.

Liquidity: MF retirement plans lock in your money for five years. After that, any exits before retirement age are charged an exit load at 1 per cent. At retirement, you can either withdraw the lumpsum or set up a Systematic Withdrawal Plan to receive your money.

Recommendation: MF plans score over other market-linked options on healthy returns, liquidity and low tax. You also have the freedom to use your money as you like. The key disadvantage, though, is a lack of track record for the newer plans and the relatively high fees (2.5-3 per cent annually) compared to the NPS.

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