Never mind the delay, but it is a long overdue reform that promises to change the way ordinary Indians look at the investment habit. Starting June, if you are self-employed or belong to the unorganized sector, you too can be part of a pension system.
The Pension Fund Regulatory and Development Authority (PFRDA) recently announced a New Pension System (NPS) that allows anybody, irrespective of their employer, to start an NPS account and save up for pension. Initially scheduled for a 1 April launch, it was deferred till June because of the forthcoming general election. Even Union government employees who joined service after January 2004 can be part of the scheme.
Apart from NPS, you could also look at insurance policies and mutual funds to plan your retirement corpus. To help you choose the right product, we give you a ready reckoner on the three products, their investment styles, cost structures and tax implications.
Also See Make Your Choice (PDF)
New Pension System (NPS)
Investment style: To keep the pattern simple, PFRDA is offering only three fund options under the scheme: equity (E), growth(G) and conservative(C). The equity fund, as suggested by a committee chaired by HDFC chairman Deepak Parekh, is an index fund that will invest in the stocks of the Nifty-50 index. Index funds are passively managed funds that reflect the portfolio and movement of their benchmark index. Similarly, while the growth fund will predominantly invest in government of India bonds, conservative funds will invest in debt securities and corporate bonds.
You get a fourth option as well. In default, according to PFRDA’s suggestion, 60% can be invested in equity, 30% in conservative and the rest in growth till the age of 35. When you reach 60, the portfolio won’t have any equity exposure, 80% will be allocated to growth and 20% to conservative fund options.
Rate of return: None of the options guarantee a return. Gaurav Mashruwala, a Mumbai-based financial planner, says: “One can expect 15-17% annualized return from equity over a period of 7-10 years, 6-8% from growth and higher return than G-secs (government securities) in (the) conservative option.”
Charges: There are four kinds of charges under NPS—fund management charges (0.009%), central record-keeping charges (Rs380 as annual maintenance fee per subscriber and Rs6 for every transaction), point of presence charge (Rs40 as registration fees) and custodian charges (0.007%). PFRDA officials say the total cost would not exceed 15-20 basis points. In other words, only 15-20 paise per Rs100 will go as charges.
Tax implication: NPS is currently EET (exempt, exempt, taxed). This means the money is tax-free during the savings and accumulation stage, but taxable when withdrawn.
How to join: PFRDA has appointed 23 entities as point of presence for registration, including State Bank of India (SBI) and Life Insurance Corporation of India (LIC).
Fund managers: Bank of India, ICICI Prudential Life Insurance Co. Ltd, Reliance Capital Ltd, UTI Mutual Fund, IDFC Mutual Fund and Kotak Mahindra Asset Management Co. Ltd.
Insurance companies offer two kinds of pension plans: endowment plans and unit-linked pension plans (ULPPs). While endowment plans invest in government securities and give you a guaranteed return along with a bonus every year, ULPPs invest in the stock market and yield market-related returns. You can also buy a pension plan with or without insurance cover. Plans with an insurance cover usually give lower returns because part of the premium goes into buying the cover. In addition, a high mortality rate also dents the return of plans with an insurance cover. So if you are already adequately insured, it is advisable to buy a policy without an insurance cover.
Investment style: Insurance companies offer multiple options, ranging from return guarantee to high growth funds. In addition, you can either opt for a deferred plan or an immediate annuity pension plan. In a deferred plan, you get regular income, but only after a certain number of years of regular investment, depending on the elected term of the policy. With an immediate annuity plan, you get regular payouts as soon as you make a lump-sum payment. An immediate annuity plan is usually taken by those who have already retired or are about to.
Rate of return: You can expect 15-17% annualized return over a period of 7-10 years from ULPPs. However, in insurance policies, hefty expenses lower your income. In the case of traditional policies, you can expect 6-8% return less expenses.
Charges: For single-premium policies, the charges are 3-10% on average. On the other hand, in regular premium policies, around 15-30% is charged in the first year; this reduces gradually from the second year.
Tax implication: Under section 80C of the Income-tax (I-T) Act, you get a tax deduction of up to Rs1 lakh on the annual premium contributed towards your elected pension plan. At the withdrawal stage, while one-third of the total amount you get as lump sum is tax-free, the remaining two-thirds that you would get annually as an annuity under the plan is taxable.
Currently, only two mutual funds—Unit Trust of India (UTI) and Franklin Templeton Investments—offer pension products. Between insurance and mutual funds, the difference is in the way they are managed, especially the longevity of the funds.
“Mutual fund management is assuming short-term investment horizons. If you are looking at a time frame of more than five years, it makes sense to look at insurance companies,” says Tarun Chugh, chief, alternate channels and group sales, ICICI Prudential Life Insurance Co. Ltd.
Investment style: In the case of UTI’s Retirement Benefit Pension Fund, around 70% of net assets are currently in debt, and the rest in equity and other instruments.
Templeton’s India Pension Plan has 48.5% in debt and 32% in equity.
Rate of return: Over the last five years, the two funds have given a return of around 8%.
Charges: There are entry fees of around 1.5% and 2.25% for UTI’s and Templeton’s pension products. In case of an early exit, a fee of around 1-5% is levied, depending on the period the money remained invested.
Tax implication: Similar to insurance policies.
For all the benefits, critics have pointed out a few disadvantages in the New Pension System. One of its biggest downsides, they say, is that it is essentially a pension scheme that does not allow you to withdraw the money before you are 60, except for critical illness or for building/buying a house. Even then, you are only allowed to withdraw 60% of the corpus as cash. The rest must be used as annuity.
Another problem with NPS is the fact that the gains from it would be taxable. This, experts say, takes away much of its appeal—they expect the next government to amend this clause.
— Staff writer
If you live in a non-CAS area and are unhappy with your cable operator, help is at hand. Starting Wednesday, all cable operators will have to adhere to new rules laid down by the Telecom Regulatory Authority of India (Trai), such as:
• Operators will have to give you a connection within a week of your formal request.
• They have to give you a notice of 15 days before disconnecting.
• They have to give you a bill for charges due every month.
• All operators must have power back-up of at least 6 hours.
— Staff writer
Experts advise that you should invest your money in Public Provident Funds before the fifth of the month since the interest is calculated on the minimum balance between that day and the last day of every month. For instance, if you already have Rs10,000 in your account, and you deposit another Rs15,000 before the fifth of the month, the interest will be calculated on Rs25,000 instead of Rs10,000. You can open a PPF account at post offices or public sector bank branches and your contribution to the scheme is voluntary. For now, PPF offers 8% interest compounded annually; this is fixed periodically by the government.
— Teena Jain
Backdating insurance policies is a common practice in the industry. It refers to the practice of pre-dating the time at which the policyholder bought the policy. It is done for several reasons, to lower premium rates for one. For instance, you are deemed to be, say, 44 if you have not crossed six months after your 44th birthday. But the company will consider you 45 if you are 44 years and 7 months old. Backdating is legally permissible, and is generally used to lower the premium commitment. In life insurance, backdating cannot be done on traditional policies. It is allowed only on unit-linked insurance plans, which provide their net asset value on a daily basis.
— Teena Jain