Planning Ahead – Peppystores


Individual citizens reassessing their priorities in the wake of the pandemic appear to be waking up to retirement

Individual citizens reassessing their priorities in the wake of the pandemic appear to be waking up to retirement

The pandemic has significantly changed people’s priorities. Many want to avoid the logistical hassle of returning to work, and if need be, not six days a week.

As much as they have begun to value “quality of life,” they are becoming cautious with their money as risk-taking has been stunted by uncertainty. There was a lot of thought and action taken instead of investing, or at least investing more safely.

interest in pensions

An interesting upward trend can be seen in pensions. Aside from the government employees who have the National Pension Scheme (NPS) and the corporate employees who have these and other options through their workplace, the individual citizen seems to be waking up to retirement. Of course, a significant part of that appeal could be the additional tax savings NPS offers for contributions up to ₹50,000 under Section 80CCD(1B) of the Income Tax Act 1961, in addition to the benefits on certain investments of up to ₹1.5 lakh under Section 80C.

Tax benefits aside, a good retirement plan is an important part of your financial planning. A retirement account and a retirement policy are its essential components. Keep in mind the depressing fact that annuities are taxable as you plan how to make that investment. The benefits of NPS are well known. Getting started early means you accumulate a decent stock that is invested in the capital markets over the years, smoothing out the cost of entry. NPS is a contribution-based system, which means that your contribution is fixed. This is the opposite of the state pensions of the past and many occupational pensions, which had a defined benefit system where the amount of the pension was determined without reference to your contribution.

Under the NPA, your regular contributions are invested in a fund option of your choice, ranging from pure debt to pure equity. You can switch at will, the system’s fees and costs are literally low, and you can open an NPS account and contribute and manage it, including switching service providers and fund options online. On a predefined vesting date, a certain portion of the corpus in your NPS account can be converted tax-free, and most of the remainder must be used to purchase an annuity from any life insurance company. Again at your choice

Multiple options

Irrespective of this, you have a wide range of options for building up your own pension provision by taking out insurance directly. The annuity policy I mentioned above gives you an annuity or periodic annuity in exchange for a premium payment. You can accumulate this premium over time or make a one-off payment. The former is known as deferred annuity and the latter as immediate annuity.

But why? An annuity, or annuity, covers the risk of living too long and is the opposite of a life insurance policy, which covers the risk of dying too early.

Living “too long” has become commonplace and retirement years can be fraught with difficulties as the days of steady income are behind you. This is where planning a pension insurance pays off.

The challenges in concentrating on this investment are, on the one hand, that everything seems to lie in the too distant future. But we see examples of seniors in our daily lives where doctor visits outweigh social calls and expenses offset reduced income.

Other potentially deterrent factors include the “low” return on the investment and the fact that the annuity is taxable.

While other retirement income and risk protection plans may be in place — perhaps rental income, time deposits and bonds, and of course stock and mutual fund investments that can pay off — the annuity outlasts these because it covers the rest of your life. Today that can be 30 to 40 years after retirement. So if the money you pay as a premium is for that risk and you would confuse it to think of it as capital that should generate a return.

The other thing is that retirement income is added to your taxable income. That’s the way it may change later, but remember, your premium has already earned you a tax benefit on deferred annuity and there’s a tax-free redemption too.

Consider the fact that these breaks aren’t available for immediate retirement as a cost of a deferred decision, but make this investment to improve your financial peace in old age.

(The author is a business journalist specializing in insurance and corporate history)

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