A rise in the cost of living and increase in the demand for expensive goods and services has led to a situation of monthly pensions not being sufficient to meet our living needs. There is often a need to create your own pension through various options available. This article covers various ways in which you can create your own pension if you are retired.
Senior Citizens’ Saving Scheme (SCSS)
This scheme has been announced by the Government of India for Indian citizens who are 60 years of age or more. It is a 5-year deposit on which interest is paid on a quarterly basis. On maturity, the tenor can be extended by another 3 years. The maximum amount that can be invested by an individual, singly or jointly with another holder, is Rs.15 lakh. The age restriction applies only to the first holder of the account. The second holder has to be the spouse and can be younger than 60 years of age. Deposits have to be in lots (multiples) of Rs.1000. SCSS is also eligible for tax deduction under Section 80C of the Income Tax Act. SCSS deposits can be opened by post offices or with designated banks. Only resident individuals can invest. The deposits are not transferable. Pre-mature withdrawal is possible after the completion of one year but with penalties. Interest is paid on a quarterly basis, at 9.2%p.a.. Interest is paid out on the last dates of the calendar quarters of March 31, June 30, September 30 and December 31, every year. Interest is reset each year. Interest can be paid out or accumulated to be paid at maturity. The reinvestment of interest into the account also earns interest. Tax is deductible at source on interest paid on SCSS deposits, if the amount of interest exceeds Rs. 5000. Declaration in Form 15H (senior citizens aged 65 or more) or Form 15G (others) can be made to ensure payment of interest without TDS. If a person is above 55 years and has received retirement benefits under a voluntary retirement scheme, such retirement proceeds can also be invested in the SCSS by such persons. Retiring personnel from defense services are eligible to invest, without any age limit, subject to other conditions. SCSS deposits cannot be pledged or offered as loan collateral.
Post Office Monthly Income Scheme (MIS)
One of the more popular schemes of the post office, the MIS offers a monthly interest at 8.4% p.a. for deposits made with the POSB, from the second month after the deposit is made. Minimum investment is Rs.1000 and maximum Rs.3 lakhs. The tenor of the scheme is six years. MIS accounts can be opened jointly by a maximum of two depositors, in which case the maximum amount permitted is Rs. 6 lakhs. A depositor can have multiple accounts but the aggregate amount across all MIS accounts with the post office cannot exceed the maximum prescribed limits. The interest payable on the scheme is reset each year with reference to market rates. Interest is subject to tax.
Monthly income plans (MIPs)
MIPs of mutual funds seek to provide a regular monthly income (without any guarantee to do so) by creating a portfolio that invests pre-dominantly in debt instruments. Children’s education plans designed for older children whose educational goals are not too far away, invest pre-dominantly in debt markets to protect the capital, and a small proportion in equity to provide the benefit of growth. The overall portfolio tends to feature a low level of risk. Debt-oriented hybrids are designed to be a low risk product for an investor who likes to earn the short term debt market return – enhanced by a small equity component that does not significantly add to the risk of the portfolio. Investors can structure the income from the mutual fund either as dividends received from the scheme or by setting in place a systematic withdrawal of units. Dividend received is exempt from tax in the hands of the investor. In case of withdrawal or redemption of units, the gains made will be taxed as short-term or long-term capital gains.
Bank Deposits & Other Deposits
Bank deposits and other deposits will generate the regular income that will be required to meet expenses. Since bank deposits are seen as risk-free institutions, there is a high degree of safety in the investment and the returns committed. The drawback is that deposit products available have a maximum tenor of 5 to 7 years after which the funds have to be re-invested at the rates prevailing in the future. This may be lower or higher than current rates and this causes uncertainty in the retirement income of the individual. Deposits, other than those with banks and financial institutions, have a high degree of risk of default and must form a small part of the portfolio. They are also highly illiquid. Interest received on deposits is taxed at the marginal rate of tax applicable to the individual.
Debentures and Bonds
Debentures, bonds and other debt instruments of various issuers can be used to generate a portion of the periodic income that will form part of the retiral income. The choice of the bonds should be made with care to reduce the risk of default by the issuer. The interest earned will depend upon the market rates at the time of issue and the default risk associated with the borrower. The interest is typically paid annually or semi-annually and is taxed in the hands of the investor. A combination of monthly income plan (mutual funds), Post office scheme, Senior citizen scheme and corporate bonds may be a suitable strategy for retirees. In case you have some surplus and you have just retired, you may evaluate investing some portion of surplus into large cap equity mutual funds as well. The proportion in each of the above categories may vary depending upon your risk appetite and existing investments.
Ankur Kapur Finqa.in