Making A Head-Start

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[We never planned for retirement,&rdquo; says Kumar Sainath, a 60-year-old government employee in Pune who retired recently. &ldquo;We thought we would stay with our children, but they work in different cities now.&rdquo; With a plot of land he hopes to sell later and a monthly pension of Rs 6,000, Sainath depends on his two sons for medical expenses. His circumstances are not ideal or, for that matter, unique. In 20 years, India will have 190 million elderly citizens as per United Nations estimates; most will have no means of social security. Combined with rapidly changing family structures, as in Sainath&rsquo;s case, planning for retirement has become now an essential part of all investment planning. That this reality is poorly understood and addressed is underscored by the fact that 89 per cent of the Indian population has no access to any form of retirement plans, according to G.V. Nageshwara Rao, managing director of IDBI Fortis. &ldquo;Retirement products are not bought by many Indians,&rdquo; he says. &ldquo;They comprise only 15 per cent of the total premiums received by the life insurance industry.&rdquo; Life expectancy, on the other hand, is increasing. The Life Insurance Corporation&rsquo;s (LIC) 2006 mortality tables, calculated once in 10 years, say that Indians will live longer by at least 15 years after retirement. Twelve years ago, they were expected to live longer by 10 years. And if you live longer, you will need to invest more, and from an early age, to ensure returns over a longer period. &ldquo;One of the essential requirements of retirement planning is starting early,&rdquo; says Yateesh Srivastava, chief marketing officer of Aegon Religare Life. That, however, does not happen, and Srivastava says, retirement planning becomes a priority only when a person is in his late 30s or early 40s &mdash; the average age at which Indians start saving for retirement is 44. By that time, the task of securing adequate income for post-retirement needs is more difficult. Array Of Choices A Bharti Axa Life study titled &lsquo;Retirement Scope&rsquo; outlines life insurance as the preferred instrument among the young, followed by bank deposits. The study shows that while people are expected to start saving for retirement rather late (from about 50), they are willing to allocate more funds towards retirement planning in their early years. Ideally, apart from savings and investment tools such as bank deposits, gold, realty, mutual funds and direct equity, a portfolio must also have a specialised pension plan. A retirement product only makes sense if one hangs on to it till 60. Those between 45 and 55 should take the balanced route, and invest in a mix of equity-linked Ulip plans and endowments. It would be wise to take term products, which protect the family when the policy holder dies, and disability riders are useful addition. But whatever strategy you adopt, the earlier you start investing, the easier it will be. For example, if you are 25 and have annual expenses of Rs 5 lakh, then assuming 5 per cent inflation and 4 per cent increase in your living standard every year, you will need a little more than Rs 1 crore annually for your expenses when you retire 35 years later. To get that money every year for, say, 20 years after you retire means you will need a substantially large corpus in hand when you retire (see &lsquo;How To Retire In Peace&rsquo; on page 74 for a detailed age-wise and expense-wise analysis.) You could then look at a variety of options to target the kind of returns you need for getting that corpus. Analyse This First, a choice must be made. Endowments are traditional products that offer a fixed return on a fixed investment for 10 years. Ulips are better if one has an investment horizon of 15 years. If quick cash is needed, a five-year mutual fund investment is ideal. &ldquo;Returns on retirement product options depend on the customer&rsquo;s risk appetite, as this determines the asset allocation in the products,&rdquo; says Rishi Mathur, vice-president of products at Bharti AXA Life. Ulip pension plans are justifiably popular. While doing this, have the agent explain the front-loaded costs. Any investment should have front-loaded charges of less than 30 per cent as commission and fund-management charges, spread evenly over five years. Then, depending upon the age profile, the investor can decide if the money should flow towards equity or debt. It is better if pension plans remain locked for 30 years. The attraction of a pension product is that the investor can, within the fund, allocate investments according to his choice. If the fear of a collapsing market sets in, the investor can call the insurance company and reduce his appetite for risky equity exposures. Since Ulips have some proportion of equity investment, they provide higher return over the long term. &nbsp; *Internal rate of return Source: Future Generali, ICICI Prudential An endowment plan provides the lowest return because the first-year commission charges can be up to 120 per cent on the investment. Also, one does not know how the fund management charges are levied. And although these plans offer tax benefits, they do not provide enough money for retirement needs. Trouble With Taxes &ldquo;Selling a retirement product to a population under 30 is a challenge,&rdquo; says Tarun Chugh, chief of alternate distribution at ICICI Prudential. Chugh adds that as long as companies do not incorporate some mandatory pension plans such as the American 401K plan &mdash; employees have to be part of a unit-linked pension plan that has to be provided by every employer &mdash; for the Indian system, pensions will not be actively bought by the public. &ldquo;People do not buy pensions in India because payment received after retirement is taxed as salary,&rdquo; says Jayant Khosla, CEO of Future Generali. The growth of retirement products was hampered in 2006-07, when the tax benefits of 80CCC (available exclusively for pension products) were merged with 80C (available for provident fund, or PF, public PF, insurance, etc.). Sources in the industry say tax benefits could re-emerge with the introduction of the Pension Fund Regulatory and Development Authority&rsquo;s New Pension Scheme (NPS). The NPS has the lowest management charges of 0.0009 per cent of the annual fund value. Compare this to the life insurance industry commissions that start from 20 per cent and go up to a maximum of 65 per cent for five years. Open to everybody, the only problem with the NPS is that the investor has to approach one of the 22 banks appointed by the government. Moreover, &ldquo;Pension schemes will be bought only if there is awareness at the individual level,&rdquo; says Yash Mohan Prasad, senior vice-president of HDFC Standard Life. And awareness is almost non-existent now. For now, retirement planning remains nascent and the elderly continue to rely on strong family networks to survive retirement in comfort. If you are keen on beating this trap-like trend, invest early. Then, life begins at 60. vishal(dot)krishna(at)abp(dot)in (Businessworld Issue Dated 21-27 July 2009) &nbsp;