Annuity Payment options against Pension Policy

Please guide me as to how to decide about selection of proper option from the following options offered by Pension Plan :

1. annuity as long as one annuitant lives

2. annuity guaranteed for 5, 10, 15 or 20 years and life thereafter

3. annuity with return of purchase price to nominee

4. annuity payable for life increasing at a simple rate of x%

 - Vinayak Bapat

Dear Vinayak, each of the option listed by you has it's own pros & cons.

1. Annuity for life - In this case the annuity amount is highest but the annuity stops the moment, annuitant dies. In this option, If there is a surviving spouse, S/he 'll not get any more annuity from the annuity provider. This Option is beneficial to the persons, where no spouse is there to survive or extra provisions are already there for spouse.

2. Annuity Gtd. for a certain period - In this option, the Annuity is provided for a certain period no matter, annuitant is alive or not during the full period. In case of premature death of annuitant, this option 'll provide annuity till the gtd. period is over. If the annuitant survives the gtd. period, the annuity 'll continue till the death of annuitant & 'll stop after her/his demise. This option is beneficial again for persons, where there is a surviving spouse & there is a history of early death in the family.

3. Annuity increasing with a simple rate of 3% - This type of annuity 'll provide a small cushion towards inflation in the later part of life. The amount of annuity is lower here than the prev. 2 discussed. Here again the annuity stops after the death of primary annuitant.

4. Annuity with return of purchase price - Under this type, annuity is paid first to annuitant till life than to spouse till life & after that the purchase price is returned to the nominees of the annuitant. The payment in this type of annuity is lowest. This is suitable to the persons who wants to leave a fortune for their heirs after their demise.

Thanks

Ashal

My recent posts on Outlook Money Facebook boards

Dear Friends, here r some of my recent posts on OLM FB Board.

http://www.facebook.com/group.php?gid=107180401906&v=app_2373072738

Thanks

Ashal

Financial Plan for a real life

Dear Sk, as I promised ur Financial plan is ready & given below.

Mr. X (SK), an Ex Indian Navy man, is currently working as an Electrical Engineer in a pvt. Shipping co. belongs to a small city in South India. Family consists of his wife Mrs. Y, & a Daughter Baby Z. On his request, a detailed analysis of his present financial condition was done. The result of analysis & corrective action recommended are given below.

The Present Condition:-

At present, Kumars are residing in a rented accommodation & they have planned to live there for at least next 7-8 years till their dream of constructing their own home is over. At present their investments in Debt (PF, PPF, FDs etc) & in Investment oriented Life Ins. Policies represents a major chunk of their investments. On assets sides there are two Residential plots out of which one ‘ll be used to construct house. To make future calculations, Income of only Mr. SK has been considered.

The inflation rate has been taken as 7%, Increase in living standard as 2% every year & Income rise is taken as 10% per annum. Life expectancy of both (Mr. & Mrs. SK) has been taken 85 years.

What are they saving for:-

At present Kumars are saving for following goals in chronological order.

1. A house current construction cost 35L Rs. as early as in 2017.
2. Financial provisioning for education, career & marriage expenses of Z
3. New Vehicle in 2018 for current cost 6L Rs.
4. Retirement after above goals r over & sufficient provisioning is there to live a comfortable retirement life.
5. Apart from above goals, a one time dream vacation of current cost 2L Rs. possibly in 2011.

The Cash Flow :-

The current monthly income is 113000 Rs. (it includes Salary + Pension + Interest).

Out of which no mandatory deductions are there.

So the Net monthly take home income (NMI) is 113000 Rs.

The living expenses are appx. 21.5% of NMI. A very good sign & indicates that almost 78-80% of ur NMI u r saving.

Currently No Loan is there hence EMI value is zero.

Ins. Prem. (Gen. + Life) is about 30.9% of NMI.

MF SIPs/RDs mly investments are around 22% of NMI

Net Monthly Cash Surplus is appx. 25.6% of NMI, A very healthy sign.

Current Assets & Investments:- Current assets includes gold valued 5.25L Rs. in the form of jewelry of Mrs. SK, Bank/Co. FDs 8.9L Rs., NSC 10K & RD 11K form the Debt part of the portfolio. Direct Eq. (Shares) are around 20K Rs. & Eq. MF 3.5L Rs. which together form the Eq. part of portfolio. Apart from this there is Insurance fund value of appx. 23.5L Rs. out of which 20.5L Rs. in Eq. linked ULIPs & 3L Rs. in debt based traditional plan. So adding the Ins. Fund value in other investments, the changed Assets & Investments situation is like this –

Plz. Note in the above calculation, for real estate, only the investment oriented 1800 Sq. feet plot value has been considered as u r going to use the bigger plot (6400 Sq. Ft.) for self consumption & it 'll remain that way. .

Combined current valuation of all assets & investments is appx. 46.5L Rs.

Protection:- Currently Mr. SK is covered for 72L Rs. Out of which 16L cover is from Aviva life long, which is to be dropped finally. So the net cover as on date ‘ll be around 56L Rs. Neither Medical ins. nor accidental insurance for self or family is there.

Liabilities:- No loan is running so loan related liabilities r nil as of now. Future financial liabilities in the form of children’s Edu., Career & marriage Exp. are there. Mr. SK intends to construct a house of valuation 40L, in future from his own money (as per his own estimate in 2017).

Path to be taken:-

Here is the future journey path of their financial nirvana.

First of all please keep amount equal to 3 months’ expenses (Living, Ins. Prem., MF SIPs) appx. 80000*3 = 240000 in your bank account for immediate liquidity in case of emergency. Try to put this amount in ur saving bank account where u have SWEEPING FD facility. Apart from it keep another 3 months’ expenses amount in Liquid plus funds for emergency.

1. Protection:- On detailed checking of lifestyle, future goals & future loan liabilities, the current Lifecover (all thru investment oriented policies) is not a good thing & the same is falling short of actual need. First of all I'm discussing for current policies.

Bajaj Unit Gain – Although policy is in wife's name but u r paying the prem. Action taken by u already as advised in mail.

Aviva Life Long – surrender this policy

HDFC traditional Endowment plan – Surrender this plan as the current surrender value is just around ur break even point

Birla Children plan – Opt for prem. Holiday. After surrendering all these policies. Ur new Sum assured from all these plans 'll be like this 40L from HDFC Y'star Ulip & 6.44L from Birla children Plan. Total around 46L.

Future requirement of Life insurance is as below.

1. In case of Home Loan, take a term Plan equal to loan amount in future as & when u r constructing the house thru home loan. The details on home loan r discussed in the Home topic.

2. Use HDFC Young Star ULIP's Sum assured for expenses of child Education & career. So keep on paying prem. Year after year with out fail.

3. Total 40L Term Plan for marriage expenses of Z. 25L term cover for age 57, to be taken from IPru Pure Protect Elite. 15L term cover from Aviva – Life Shield Plus for age 52.

4. To cover living expenses of ur family adequately in ur absence, Take 50L term cover for age 60 from Aegon Religare's I-Term. & another 50L Term cover from Kotak Preferred Term Plan. Take these plans immediately.

Please note, While selecting Term plans, importance is given to have the cheapest term cover or next to cheapest cover & over all to have a mix of covers from different Ins. Cos. You may discuss (if u feel that the idea is not at all comfortable with u) in detail.

Purchase a Family Floater mediclaim policy for ur family's medical expenses of at least 5L cover. The prem. paid by you for this policy is eligible for Tax benefit under section 80-D for max. limit of 15000 Rs.

As & when u purchase ur house, Insure it with a House Holder (HH) policy from IFFCO Tokio General Insurance Co. with detailed covers of building for earth quake, lightening, floods & terrorists activities for current market valuation of ur property, fixtures & furniture, electrical equipments & appliances for theft & break down, Jewelry for upto 50K in house against theft & loss in traveling. With this HH policy, plz. take accidental insurance of 10L for urself & 5L for ur wife. While Taking this policy, try to take 7-8 sections to get maximum discount on prem. Plz. take this policy for an year only & renew the same for market value of ur property year after year. Plz. keep the purchase documents of ur jewelry, electrical & other equipments safely as these ‘ll be required at the time of claim if it happens. Apart from 50K valuation, keep remaining jewelry in bank lockers.

I’m advising for specific cover of 50K for jewelry as beyond this amount the Ins. Co. ‘ll ask u to provide purchase & valuation details of the jewelry, which ‘ll be quite problematic to u, as I think a major part of this is received as marriage gift by Mrs. Karthika.

2 Home:- As of now u are planning to purchase another plot as an investment, Plz. Don't do that. The reason is ur current financial condition as well as future liabilities r not allowing u to do it. Also ur family is still living in a rented accommodation. So ur first priority should be to construct a house on ur plot. There is more logic in doing so immediately, say after 2-3 years from now onwards, something happens to u, & ur family is still living in rented house, then how ‘ll they live like that continuously in ur absence & how ‘ll ur wife, construct the house?

For construction of house, start the work immediately. Use 5-6L Rs. From ur Fds for ur own contribution & for balance amount go for a home loan of 24-25L Rs. Based on ur income level, any bank 'll finance u easily. My preference 'll be SBI & within SBI the specific product 'll be Max Gain home loan. For details on SBI Max. Gain home loan, u may discuss in detail after going thru the plan. Go for a 20Y loan term as of now. The appx. EMI 'll be around 21K Rs. As of now which is very much within the limit of ur mly cash surplus amount.

Don’t forget to insure ur house property at the time of completion of construction for its fair market value & renew the same every year.

P. S. As u r liquidating a part of ur FDs for construction of ur house, ur Interest income ‘ll come down & so do ur total mly income (Salary + Pension + Interest ). The reduction ‘ll depend upon how much money u r pulling out from ur FDs. & also what Interest rate FDs u r redeeming.

3 Child:- From ur own reply, u r planning to save 5L Rs. in today’s value for career related expenses of Z. So the obvious thing is u r planning to shoulder the responsibility of normal education of Z from ur own pocket. Keeping in view the spiraling cost of education, ur future expenses on this ‘ll increase in a big way. So I’m calculating that a education funding corpus is created which ‘ll cover all these education related expenses.

Back of the envelope calculation shows that a one time investment of around 24L Rs. growing @ 15% growth rate can easily cover education expenses from nursery class to professional education. The calculation also indicates that the current HDFC Y’star ULIP of 2L yly prem. can sufficiently do all this thing. So u need not to worry for education & career related expenses of Z.

For Z's marriage & as a back up for edu. & Career expenses of Z in case there is a short fall from HDFC Y'g Star ULIP. Start investing 10K Rs. monthly in Eq. MFs & balanced funds. Increase this amount by 2000 Rs. Every year. U 'll wonder from where this amount 'll arrive, My dear friend, the prem. Saved from surrendered policies is the answer. The saved prem. Amount is almost 2.5L Rs. Yly. So after investing 1.2L Rs. yly for Z’s marriage & Education back up, u r still left with 1.3L Rs. spare cash yly.

Keeping in view the current gold holding u have, no separate provisioning is advised to accumulate gold for Z’s marriage. I’m open for discussion on this if u want to.

4 Vehicle:- Invest 11K Rs. (from remaining Prem. saved amount) Mly in MFs, primarily in balanced funds to save for ur dream vehicle. @ a conservative growth rate of 12%, within next 4 years i.e. around 2014, u ‘ll have enough cash in ur pocket to purchase ur dream vehicle with ur own money.

5 Retirement:- For post retirement life, life expectancy is assumed up to age 85 both U & Mrs. Y. Inflation rate of 7% is taken as basis for calculating post retirement life expenses. An increase in ur life style @ 2% per annum is also considered from current level for calculation of retirement corpus.

Ur current mly expenses are around 25000 Rs. out of which 4K Rs. is the house rent, which ‘ll not be there as & when ur own house is completed. So the net living expenses r around 21000 Rs. only. After retirement, there ‘ll be reduction of appx. 35% in this figure so ur post retirement life, mly exp. ‘ll be around 13650 Rs. in current value.

The Corpus required for your retirement is appx. 3.9Crore Rs. Out of which your current investments in Fds (less withdraw for House construction), Policy surrender amount & current Shares & Mfs investments (total 12L) as well as the 1800 Sq. Ft. plot (current valuation taken as 5L Rs.) are considered as starting capital. The growth rate for these 17L Rs. from now onwards is taken @ 8.5%.

The monthly amount to be invested for creating retirement funds is 1.55L Rs. Mly if u opt to retire @ age 50 @ 15% growth rate for this new investment from now onwards year after year.

That’s the reason enough to show u that u can’t think of retiring @ age 50.

The monthly investment requirement for retirement funds is 25K Rs. Mly if u opt to retire @ age 60 @ 15% growth rate for this new investment from now onwards year after year. U r already investing almost the same amount in MFs/RDs as of now. So the question remains only to go for the correct choice of MFs.

Till your age 50 the major portion of retirement funds ‘ll be in Pure Eq. MFs. From then onwards divert ur fresh investments in balanced funds & also bring down your pure Eq. holdings to 40% till u reach age 55 in favor of balanced funds. At the time of retirement have a mix of Pure Eq. MFs, Balanced, MIPs, Fixed Income instruments. No morecomment as of now for exact % of individual instrument at the time of retirement.

5 Vacation:- As of now plz. Skip ur vacation plan for at least the construction of ur house is over within next 18-24 months. We ‘ll revisit in between to provide funding within ur overall cash flow to go for a vacation.

Note:-

List of MFs‘ll be provided after getting your review on above financial plan.

All the above analysis, planning & advises there on, are based on ur current salary structure.

Please feel free to ask whatever doubts, questions you have.

I wish for best of your future life. Happy Investing.

Please take good care of yourself & your family.

Thanks

Ashal Jauhari.

Guaranteed income for a lady with zero risk tolerance

Q. - My friend`s sister is getting married at the age 43. After having worked in many companies she was able to save an amount of Rs. 69 lakhs. All this amount is parked in FDs in a few banks. After marriage she does not plan to go to work, but is insistant that financialy she wants to be independent and wants to receive fixed income from the proceeds of the 69 L throughout her life. She says she cant take any risk with her saved funds. Can she approach an insurance company, say LIC or HDFC Standard Life and buy annuity for a term of 30 years ? If yes, what could be the monthly amount ? She is very clear she does not want to invest in shares or life insurance, as the husband will, through his income will cover for insurance etc. Please help. Thanks, Y Pal.

Ans. Dear Y pal, Here is the path.

1. Invest 4.5L Rs. in POMIS to earn 3K Rs. mly.
2.
(a) Invest around 10L Rs. in LIC`s Jeevan Akshay VI plan Option (i). It`s an immediate annuity plan. the mly. earning `ll be around 6800 Rs.
(b) Invest around 10L Rs. in LIC`s Jeevan Akshay VI plan Option (ii). the mly. earning `ll be around 6400 Rs.
(c) Invest around 10L Rs. in LIC`s Jeevan Akshay IV plan Option (iii). the mly. earning `ll be around 6000 Rs.

Till now around 35L Rs. r invested & she is able to earn a gtd. income of appx. 22K Rs.

For remaining 34L Rs. invest 20L Rs. in Bank FDs of various term say 1,2,3Y for her emergency & liquidity needs.

For Last 14L Rs. invest the same in Birla MIP II savings 5 Plan (growth option) to give a kick in return for her future life against impact of inflation.

As u said she is risk averse on her capital, I have not advised any higher Eq.% related instruments. In case of Birla MIP, the max. Eq. component is limited to just 5%.

Thanks

Ashal

Q. - Superb ashalanshu ! I will convey your suggestions verbatim to her. Thanks a lot. Regards, Y Pal.

Ans. - Dear Y Pal, thanks for ur regard & joy. Now onwards the most important work starts. Knowing the kind of money the lady in question has, the agents of LIC as well as other Ins. cos. executives of Banks etc. all `ll try their level best to sell some thing which is not meant for her. So she should remain straight in her demands of products.

There is one important thing - from the gtd. mly income of around 22K Rs. her annual gtd. income `ll be around 2.65L Rs. Now add the Bank FD interest to it (from Bank FDs of 20L Rs.) her total income in all probability `ll be around 4L to 4.25L Rs. I assume she may earn around 1.25L to 1.75L Rs. interest on these bank FDs (interest rates r going up). It means she w`d have to pay income tax. But as per the proposed budget for FY 2010-2011, she may invest a max. of 1.2L Rs. in section 80C instruments & another 15K Rs. in mediclaim policies under section 80D. thus total investment in Tax saving instruments `ll be around 1.35L Rs. & her net income (post Tax saving investment) `ll be 2.65L to 3L Rs. As her age is only 43Y, her zero tax limit is 1.9L Rs. Above this she w`d have to pay Income Tax @ 10.3% rate = 8 to 11K Rs. as Tax. appx.

Post Tax her net income for consumption `ll be around 2.55L to 2.9L Rs.

Now comes the last question, where to invest for 1L rs. of 80C Tax saving?

Ask her to open a PPF acct. if not opened already & to deposit the max. possible 70K Rs. from 1st to 5th april @ the start of every FY. For remaining 30K she may invest in ELSS (Tax saver MFs) if she is ready to take this small amount of money on risk otherwise the Tax saver bank FDs r the final way.

thanks

ashal

Q. - Thanks ashalanshu once again. So kind of you. I dont think she has done so much forward planning which is to invest the returns from investments into tax saving 80C. Even I did not think from the tax saving angle. Thanks for your kind help. Regards....Y Pal

NPS - Not Cheap

NPS is not that much cheap as it's look in first glance. For investors of higher amounts indeed it's providing the benefit of size but for small investors it's not cheap at all. For a small investors investing just 6K Rs. the minimum yly. subscription, sample this.

Fund management charges are low enough, but the fixed charges are high. In a bad year, when you barely manage to invest 6000 in the requisite 4 yearly installments, you incur the following charges:
A. Account opening charge of Rs. 50 (only required for the first year)
B. Annual maintenance charge of Rs. 350
C. 4 transactions, Rs. 10 fees to CRA for each. Total Rs. 40.
D. Registration with PoP (Point of Presence, kind of the investor’s broker): Rs. 40. This will be required not just the first time, but everytime the PoP is changed for some reason (e.g. migration from one location to another)
D. 4 transactions, Rs. 20 fees to PoP for each. Total Rs. 80.
Other charges are negligible; but these charges total to Rs. 560. This is 9.33 percentage of the investment for the year (Rs. 6000). Consider it kind of an entry load for NPS.

In the light of the above facts, NPS is useful for investors who r going to commit higher amounts, as barring Fund management charge, all other charges r not linked to the investment or fund, instead they r fixed in nature & may prove counter productive for lower investment amounts.

Thanks

Ashal

JEEVAN TARANG AS AN ANNUITY OPTION

Q. - Is it better to go for an annuity like Jeevan Tarang of LIC or an MF with term insurance.Annuity offers returns for lifetime whereas MF does not.Also please tell me which is the best annuity available.My age is 39 and i am due to retire on age 58? - Vinod Pulari

ANS. - Dear Vinod Pulari, Plz. don't opt Jeevan Tarang, for ur age the return from this policy r very poor. Sample this -
For a 5L cover, for ur age, the prem. for 20Y policy = 24610 Rs.

Hence total prem. paid over 20 years = 492200 Rs.
For past 4 years the LIC have announced 48 Rs. bonus per annum per 000 sum assured, so we can take this as benchmark for our calculation.
At the end of 20 year, u 'll get amount = 20*48*500 = 480000 Rs. or appx. ur prem. back.
From 21st year u 'll get 25000 Rs. (5% of 5L Rs.) as survival benefit every year tax free till u r alive.
After ur death, ur nominee 'll get the basic sum assured of 5L Rs. back as maturity benefit.
Now compare this with the combo of PPF+Term Plan (Anmol Jeevan from LIC).
Plz. note cheaper term insurance plans r available in market but i'm limiting it to LIC's Anmol Jeevan for comparing of product within same Ins. co. The annual prem. for 5L cover for 20 Year plan = 3193 Rs.
difference in the prem. = 24610-3193 = 21417 Rs.
Invest this amt. every year in PPF, at the end of 20 year, the amt. in PPF = 10.58L
Withdraw from PPF amt. equal to bonus declared by LIC = 10.58L - 4.8L = 5.78L Rs.
This 5.78L Rs. 'll remain in PPF 'll earn interest for next year. After 1 year the interest on 5.78L Rs. = 46240 out of which u may withdraw 25K Rs. as tax free.
Balance amt. 'll remain with PPF & like vise every year, u 'll withdraw only 25K & the PPF amt. 'll keep on increasing.
Plz. note in this case even after 25 years or 30 years from now onwards or for ur age of 65-70, at ur death, ur nominee 'll receive more than what they 'll get in Jeevan Tarang (the basic sum assured of 5L Rs. only).
Now do tell me, what r u going to opt?
Plz. note here i have not advised to invest in any Eq. MFs for betterment of return. U r already aware that PPF is one of the safest scheme.


Thanks

Ashal

NEW PENSION SYSTEM - NPS

Dear friends, a lot of u were demanding details on the NPS, so for  benefit of all of you. Here i'm giving some details of this.

WHO CAN INVEST?
Scheme is open to all Indian citizens aged between 18 years and 55 years.

WHERE TO INVEST??
You can invest from any of the 285 Point of Service across India, run by 22 Point of Presence Providers(POP) including SBI, its 7 Associate Banks, ICICI Bank, LIC, Reliance Capital, etc. Once registered, the Central Recordkeeping Agency (CRA) will give you a Permanent Retirement Account Number (PRAN) along with Telephone and Internet Passwords.

HOW DOES THE NPS WORK??
Just like a Depository maintains Demat Accounts, likewise your Records are maintained by the Depositories.
Six Different Pension Fund Managers would invest the Amount Invested by the Commonn People into Different Asset Classes classifed as
Equity (E)
Government Securities (G)
Debt Instruments (C)

The Six Fund Managers are
ICICI Prudential pension Management\
IDFC Pension Fund Management
Kotak Mahindra Pension Fund
Reliance Capital Pension Fund,
SBI Pension Fund
UTI Retirement solutions

Depending on the efficiency of the Fund Manager, these Contributions would Grow and accumulate over the years.
You do need to mention the Fund Manager of your Choice, without this, your Application is liable to be rejected.
The Default Investment is called the Auto Choice Lifestyle Fund.
For a investor below 35 years of age, 50% of investment amount will go into E(Equity), one-fifth into asset class G(Govt Securities), and the rest into asset class C(Debt Instruments). From the age of 36, the default proportion going to equities decrease annually and investment percentage in government securities will increase such that by the age of 60, these investments will gradually be adjusted so that only 10% remains in equities, another 10% in corporate bonds and 80% in government bonds.

MINIMUM CONTRIBUTION :
Minimum Contribution per annum is 6000 and you can contribute even as low as 500, at least 4 times a year. You can invest through Cash, Cheque or DD at the POP.
There is no upper ceiling for your annual contribution but Tax Benefits is capped at 1 lakh under Sec80C. The Investor HAS to invest at least once every quarter. In case of default, you will have to pay Rs.100per annum and also need to pay the required minimum amount to reactivate your Account.
Also during this period of your non-payment, your Corpus will keep getting reduced because the NPS will keep charging its Expenses against your Units. The Account will be closed as and when the Value of your Account falls to Zero.


WHERE IS MY MONEY INVESTED???
You have got the Right to decide where your money is invested. Please note, that you cannot invest more than 50% in Equity and Fund Managers cannot in invidual stocks but only in Index Funds.



RETURNS :
On Completion of 60 years, the investor`s accumulated amount gets transformed into a lumpsum towards buying Annuity for a steady stream of payments for the rest of the Investor`s life. The Insurance Companies, who come into the picture now, with their expertise will compute as to how long the investor could survive and offer flexible investment and payment options on annuities.
If the subscriber exits the scheme before the age of 60, s/he may keep one fifth of the accumulated saving and invest the rest in annuities offered by insurance companies.
A person who exits NPS when his age is between 60 and 70 has to use 40% of the corpus to buy an annuity and can take the rest of the money out in one go or in instalments. If a subscriber dies, the nominee has the option to receive the entire pension wealth as a lump sum.

LAST YEAR THE NPS GAVE A RETURN OF 14.82% WHILE HANDLING THE CORPUS OF CIVIL SERVICE PENSIONS.


TAX ANGLE :
At present, the NPS is to be Taxed at the time of Withdrawal. The Pension Fund Regulator has taken up the issue with the Finance Ministry to address the anamoly and the decision is expected within next year or so.


NEGATIVES :
1) Though the Fund Management is ridiculously low at a miniscule 0.0009% per annum, the Cost of Opening an Account(Rs.50), Annual Maintenance Charge(Rs.350) and a Per Transaction Charge of Rs.10 actually makes the NPS COSTLIER than a Regular Mutual Fund with a 500 monthly sip. The cost works out to around Rs.350 as fixed cost on every Rs.2000 he contributes. Unless the Govt steps in to correct this, NPS would be a failure with the small savers.
2) No Tax Concession on Withdrawals.
3) No premature Withdrawals allowed expect for Critical Illness, building/buying a house; Even at sixty, you can only withdraw as cash 60 per cent of the corpus, the rest must be used to buy an annuity.
4) You need to compulsorily buy Immediate Annuity with 80% of the Money accumulated, if you want to Withdraw before you are 60.

POSITIVES :
1) The Investor has the option of shifting from One fund Manager to another by instructing his POP to do so. This facility is available between May 1 and May 15 every year.

2) Even relocating to another city will not affect your investment as the PRAN remains the same.
3) The Monthly/Quarterly Contribution towards the NPS will be partly routed towards Equity which will automatically ensure Rupee cost Averaging and ensure High Returns and thus ensure 'higher than inflation' returns.
4) Investment upto Rs.1 lakh is Tax Deductible under Sec80c.
5) For Investors with slightly larger amounts and investing 4 times a year, the charges are attractively low. The NPS wins hands down on this matter.

CONCLUSION :
This is the Best thing to have happened to the Indian Investors who have not had much of a choice regarding Pension earlier. The benefits of Compounded Returns that the NPS offers will be immense. If the NPS is promoted in the right way, it will be no less than a Revolution.
The Tax on Withdrawal, for me, is a blunder and will be rectified by the Govt sooner rather than later.
The Interim Withdrawal too may be allowed in future, which will make this product that much more attractive.
The best option as of now i think is to remain invested in max. Eq. for person below age 50 & above that should go for the LifeCycle Fund.
The Low Charges and Automatic Rupee Cost Averaging makes NPS a Better Option than the Pension Plans offered by Insurance Companies.

But still some loose ends are there so as of now enter in NPS with minimum annual commitement of 6K Rs. & wait for the dust to settle & the clarity on taxation matters & then bump up ur investment in NPS.

Thanks

Ashal

DEBT funds or DIversified funds for Retirement

Question - 

Hi,
If we see returns of Diversified equity funds for last three years mostly are in red and few are sitting on marginal gains whereas debt funds have given return of 40% over 3 years. Looking at scenario, if i want to invet for my retirement(for 20 Years from now) what is your openinon where should i invest. If you say to invet in Equity MF how should i select for 20 years? If you say Debt funds what are good options available?

Rohit

Answer - Dear rohit, When u r talking for ur retirement, u should n`t compare the past 3 years` returns for ur future 20 years.

Just for ur info, Eq. is the only asset class which `ll provide inflation adjusted best returns over such long 20 years.

Now look at the following No.

On 31st of march 1989 (i.e. 20 years back) the SENSEX level was 713.60 & on 31st March 2009 the sensex level was 9708.50.

The above Nos. tell the CAGR of Sensex for past 20 years = 13.94% or almost 14%. Even if u adjust 7% inflation rate for all these 20 years, still u r getting 7% positive return over the inflation.

In my view u should invest in 3 large cap funds thru SIP. Check the performance of ur funds once in a year. If the performance is in line with over all market performance it`s ok to continue ur SIP, if the performance lags continuously for 3-4 quarters, switch ur SIP to a better performing fund. After 14-15 years, Stop fresh SIP in large cap funds. Divert SIP amount to balanced funds & gradually shift ur money from Eq. funds to Debt funds when ur retirement is closer to u. 

After 20 years, when u r retired, u should n`t have more than 15-20% money in Eq. funds.

Thanks

Ashal ...

How to go for Pension Plans or retirement Planning

How to plan for retirement. I am investing in PPF regularly but very actively looking for retirement from ICICI, HDFC or Metlife. Still not clear on what`s best, looking at following parameters to start with:
a. Minimal Premium Accumulation Charge ( Even if it`s there, then only for regular premium for first few years ).
b. No or very little premium on Top-ups
c. Clear guidelines on Annuity plan ( ICICI explains most clearly but doesn`t give all answers ).
d. Death Benefits ( I don`t want life insurance cover )
e. Any other charges if any should be clearly started in terms on figures on monthly/annual basis, also whether expenses are on NAV or premium paid.

Answer - Dear Friend, Plz. do a simple exercise. Call at least 5-6 Ins. agents from different Ins. cos. & give following details to agents. 

1. Age of Person, 60 years (the age u `ll start receiving ur pension)
2. Amount to be invested 1Crore
3. Plan selected - Immediate Annuity Plan.
4. Ask to give benefit Illustration of mly. pension till life of policy holder after that same pension to spouse till life & after that return of purchase price to the legal heirs of policy holder.

Plz. do this exercise with at least 5-6 Ins. cos. inform me for ur findings after completing ur exercise.

Why I`m asking to do so, bcoz when u `ll go thru this exercise, u `ll come to know what the meaning of large corpus creation is? Plz. do note as per my prev. reply of retirement corpus, calculate ur own requirement as per inflation no.

Thanks

Ashal ...

Taxfree income for a retiree

Some days ago, Mr. Sharma, an elderly person came to me for advice on how to plan his investments after retirement. He was retired at the end of last FY & after so much noises in the financial market regarding Share market crash, high inflation, recession etc., he was not sure what to do, where & how much to park his hard earned retirement kitty. Here is the initial data –
Present family size – Husband aged 60 & wife aged 57 only. (children, 1 son & 1 daughter, both are married & settled in their life respectively),
Annual expenses for living, Medical Ins. Prem. & visit to children once in a year = 150000 Rs.
Retirement funds received net of taxes = 35L Rs.
Currently both Mr. & Mrs. Sharma owns individual PPF accounts having 10L Rs. in each.
House they r living in currently, is their own & market value is around 40L Rs. as of now.
Apart from this, some shares in demat accounts of both with combined valuation of around 5L Rs. after prediwali crash & most of the shares r bluechips. But there was no Eq. MF investment as on date.
Mrs. Sharma is a housewife, all through her life.
Although they have direct Eq. investments but are reluctant to invest in direct Eq. or in Eq. MFs at present.

As his age is 60 only, he can’t anjoy the higher tax exemption limit of Sr. citizen at present, so it is necessary to keep his Tax incidence in mind while advising on investments.

The advice – Out of his retirement kitty of 35L Rs. (which was lying in saving bank account at present), I advised to loan an amount of 18.5L Rs. to his wife (Mrs. Sharma) as an interest free loan. After giving the 18.5L Rs., He w'h have 16.5L Rs.

Here r investments of Mr. Sharma –
1. 4.5L Rs. in POMIS - annual income 36K Rs.
2. 7L Rs. in SCSS - annual income 63K Rs.
3. 4.5L Rs. in various banks’ FDs of higher rates 10.5% avg. – annual income 49K Rs.
4. 0.5L Rs. in saving bank account for emergencies – annual income 1.7K Rs.
Total annual income = 1.49L Rs. which is just a tad below his taxable income limit of 1.5L Rs. Hence no tax at all.
Here r investments of Mrs. Sharma –
1. 4.5L Rs. in POMIS - annual income 36K Rs.
2. 11L Rs. in various banks’ FDs of higher rates 10.5% avg. – annual income 120K Rs.
3. 2.5L Rs. in bank FDs of smaller duration ranging 6-12 months earning 8% avg. (this was for medical & other major expensive emergencies) – annual income 20K Rs.
4. 0.5L Rs. in saving bank account for emergencies – annual income 1.7K Rs.
Total annual income = 1.78L Rs. which is just a tad below her taxable income limit of 1.8L Rs. Hence no tax at all.

So after all this, the annual income for the family is 3.27L Rs. & no tax at all. All the investments were made in the highest possible safe instruments (POMIS, SCSS & Bank FDs). After deducting the annual expenses of 1.5L Rs., there was a surplus cashflow of 1.77L Rs. As their expenses were taken care off, Income Tax liability was zero, I advised to invest this surplus cash in a mix of MIP & balanced funds in 80:20 ratio. Even incase of MIP, 75% allocation was made for < or = 20% Eq. exposure MIPs & rest 25% was in 20-40% max. Eq. exposure MIPs. Thru MIPs & balanced funds, the total Eq. exposure was 33% or 58K Rs. out of total investment of 1.77L Rs. of surplus cash.
The investment in MIPs & balanced funds is to be used as buffer & to give kick in returns to fight inflation.

The basic retirement kitty of 35L rs. was fully safe, zero income tax, & at the same time surplus cash is providing a cushion for future increase in expenses due to inflation. After his age of 70-72, in future, if the interest income generated by his total investments falls short of his the than mly. expenses, the option of reverse mortgage is there to supplement the income requirement.

After all the No. crunching, now Mr. Sharma is fully satisfied with this portfolio & he is investing based on this advise.

Lump Sum Investment during Retirement

My uncle is around 65 yrs. Recently he has got a lump sum of Rs.2 lacs as arrears. Please suggest whether investing in land/FD/MF would be better.

If anyone would suggest a good financial planner it would be of great help.

Dear, As his age is already 65 or may be 65 in current FY. The zero Tax limit for him 'll be 2.25L Rs. Although not much data regarding his current income & investments is available, still for his age investment in Land is strict no-no.

Invest in bank FDs & MFs as per his liquidity requirement. Even under MFs, invest in FMPs, Bond funds & MIPs. Avoid Eq. funds for his age.

Thanks

Ashal