What is a Retirement Fund?

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.

What is the Purpose of a Retirement Fund?

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.

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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.

Who Should Invest In A Retirement Fund?

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.

What Should be the Mode of Investing?

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).

  • One time investment – One-time investment, or lumpsum investment, is a process where an investor capitalises a substantial amount at one go. This method is usually preferred by individuals with a healthy cash reserve and higher risk appetite.
  • SIP – Also known as Systematic Investment Plan, SIPs involve investing a certain sum of money every month till an investor fulfils his or her investment goal.

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.

How To Calculate The Amount You Would Need For Retirement?

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.

Major Advantages

There are several advantages of investing in a pension fund. These include –

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  • Long-term saving – These plans are long-term savings schemes, regardless of whether an investor opts for monthly pay-outs or lump sum disbursal. Retirement funds create an income that can even be invested further.
  • Flexibility – An investor can choose to get paid either a lump sum amount or monthly annuity depending on their financial requirements and plans. One can even opt for a deferred annuity plan to secure a higher corpus for post-retirement.
  • Offers insurance – Most pension policies serve as a life insurance cover, protecting an insurer from any financial loss in case of their demise before retirement. It also allows the investor to withdraw a lump sum amount in case they face any medical emergency. This can prove beneficial to pay for long-term health cares and is an important feature of pension funds.
  • Protection against inflation – Investing in pension plans is a preferred method of protecting one’s asset against inflation. Most retirement plans offer some form of compensation against inflation, and disburse one-third of the accumulated corpus after retirement and utilise the remaining two-thirds as a monthly annuity for the investor.
  • Risk free investment – Mutual fund retirement plans are one of the safest avenues of investment as they have an extremely low-risk profile. Investors also have the option to put their money in government securities for an assured return or invest in debt and equity to earn better returns. The risk is suitably balanced with the prospect of return and an individual’s risk appetite.

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