Retirement funds, also known as pension funds, are investment options that allow an individual to save a certain portion of their income for their retirement. These funds offer a regular source of finance after one retires; a retiree receives annuity on their investment until their demise.
Pension funds are invested on the investor's behalf, and the income generated from that investment is contributed as the interest provided on the pool of funds. These offer a fixed benefit, as it does not depend on asset return and market fluctuations.
Retirement mutual fund plans usually invest in low risk investment options, like Government-securities, to ensure steady returns. Pension funds usually offer up to 11% interest depending on the policy and investments, making them best suited for retirement planning than any of the alternatives.
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The primary purpose of a retirement savings fund is to create a steady source of revenue for an investor when he or she does not have a source of income. It can be considered as a form of deferred pay, providing financial security and enough capital to pay for the necessities of individuals.
Most pension funds offer the option to receive the returns as either monthly annuity, or in a lump sum amount. Monthly annuity is paid at a fixed rate, in most cases including inflation protection. It is one of the most important advantages as an investor receives the return from their retirement fund adjusted to present denomination.
Lump sum payments disburse the total amount of accumulated wealth to the investor after he or she retires. It allocates a substantial financial backing, however, removes the regular source of return from monthly annuity payments.
Any contribution made towards retirement mutual funds is tax exempted up to a maximum amount of Rs. 1.5 Lakh (under Section 80CCC). These contributions can include both buying a new pension plan and renewing any existing fund to extend its services. However, the withdrawals are tax deductible. As the money is distributed as an annuity, it will draw tax depending on the existing rates.
Periodical payment of pensions is fully taxable, similar to policies levied on an individual's salary. However, if an individual opts for disbursement of the total amount post-retirement, its taxation policy may change. Government employees (including individuals employed in the armed force) will be exempted from all taxes during disbursal.
Non-government employees may enjoy only partial tax exemptions to a certain amount. If gratuity is included with a pension, one-third of the total amount is exempted, otherwise, only half of the total fund is tax exempted.
Pension disbursed as a monthly annuity by any family member is taxed as income generated from other sources. However, it is tax exempted to a certain limit; up to Rs. 15,000, or one-third of the monthly annuity, whichever is less, is exempted from taxes. If an individual opts for disbursal of the total retirement fund, it is exempted from all taxes.
Pension plans offer a source of finance to pay for everyday necessities as well as any unforeseen circumstances. These mutual fund retirement plans carry much less risk than other forms of investments, making them ideal to secure assured returns for senior citizens.
Moreover, an investor can choose from several different types of pension funds available in India, allowing them to plan according to their unique financial needs.
There are primarily 3 different plans one can choose from. The most popular plan solely invests in debt profiles, making them extremely safe and ideal for a conservative borrower. There are also plans that are unit-linked, investing in both equity, and debt profiles equally. These present slightly higher risk, however, offer higher returns as well.
On the other hand, investors can also opt for National Pension Schemes, Government-backed retirement funds. This scheme allows investment in both debt and equity market according to an investor's preference; one can also withdraw 60% of the total fund at the time of retirement and utilise the remaining 40% as annuity payment. The maturity amount is tax-free.
There are primarily 2 ways to invest in these types of the fund; one can either choose to make a one-time lumpsum investment or opt to invest via a Systematic Investment Plan (SIP).
Both the above-mentioned processes offer certain merits as well as shortcomings. For example, lumpsum investments promise significantly higher returns with market appreciation. However, they are also exposed to more risks when compared to SIPs. Worth mentioning, only seasoned investors prefer such one-time investments.
SIPs are better suited for first-time investors, as they inculcate a habit of investing and create a pool of fund over a longer time period. It allows new investors to capitalise their wealth without any financial strain. It will also help them plan for their retirement benefits in a more efficient manner.
An individual has to consider several aspects, including their possible age of retirement, life expectancy, inflation, rate of return, etc. while calculating a retirement fund. For example, someone in their 30's will have 30 years to save or invest to prepare for their retirement. If their annual expense is Rs. 7,20,000, then they will require a corpus of Rs. 54,80,824 (with 7.00% inflation year-on-year) to maintain financial stability after retirement.
One can also use online applications, like the Groww Retirement Calculator, to conveniently determine the required amount. It helps calculate the amount required at retirement by evaluating several key factors like an individual's age, monthly expenditure, possible inflation rate, etc. It also shows how much one save every month to reach the targeted amount.
There are several advantages of investing in a pension fund. These include -
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