A potential Indian Retirement Savings crisis is rearing its ugly head. Inflation, increasing lifespans and the ongoing breakdown of the joint family system in urban areas, are just three of a multitude of factors that are combinedly accelerating the already burgeoning need for an aggressive and disciplined retirement savings plan.
An Aegon report recently estimated that only around 64 per cent Indians are retirement ready in the true sense, and about three in five save habitually for their retirement. Only 11 per cent Indians are covered under formal pension schemes, and a lot of us save in low yielding instruments such as traditional insurance, deposits and PPF for our retirement. In such a scenario, there are a few steps that the government could take in the upcoming budget to help make India more retirement ready.
Reduce tax burdensThe obvious way in which the government can help make India more Retirement Ready is by reducing income tax burdens, thereby increasing disposable incomes. Traditionally, India has been a Nation of savers, and it's likely that this excess disposable income will not be completely frittered away, but rather that a hefty portion of it will find its way into long term savings instruments. Particularly worth reconsidering is the income level at which the 30 per cent tax slab becomes applicable. If this is hiked from 10 lakhs to 20 lakhs, it would allow individuals who are in the most urgent need to step up their retirement savings (individuals in the age bracket of 30 to 40) to divert an additional sum of Rs. 1 lakh per annum towards their nest eggs.
Restructuring of the NPSThe well-intended NPS was opened to all citizens in 2009, but has hardly picked up pace even now. In the past seven years, all NPS Tier-1 accounts (the bona fide retirement planning tool, with Tier-II acting more like an open ended Mutual Fund) have a combined balance of just about Rs. 5,000 crores. To put this number in perspective, many single Mutual Fund schemes have assets under management more than Rs. 10,000 crores! There are many reasons why the NPS hasn't picked up pace, and the government would do well to fix a few of these issues in the current budget. First, the mandated annuity purchase (with 40 per cent of the corpus) can be done away with, paving the way for a more efficient deployment of the retirement corpus garnered over the years. Second, investors could be given the option of maintaining an equity allocation of 80 per cent or more for the length of the plan, reducing it only in the last five years leading up to an individual's retirement date. Third, the obsessive focus on cost-control can be lifted, allowing for the infusion of more talent into the fund management teams; thereby improving fund performance. Fourth, the additional tax benefit available under Section 80CCD(1b) could be hiked from Rs. 50,000 per annum, to at least Rs. 1.5 lakhs - this move will surely help the NPS pick up pace. Lastly, NPS proceeds need to be made completely tax-free, to remove their disparity with the EPF; which has a lower potential for creating long-term retirement wealth.
Make Annuities Tax FreeAnnuities, by themselves, are low yielding products. The average annual income from an annuitized sum of Rs. 1 crore would be roughly 7-9 lakhs, depending upon the policy and the annuity type. To top it off, annuity incomes are presently taxed as normal income. For retired individuals who have additional sources of income such as rent, this sometimes means a straight up deduction of 20-30 percent of the annuity amount. Considering that the retired individual has already spent a lifetime paying taxes, and has quite likely already paid income taxes on the annuitized saving amount, this appears a bit unfair, to say the least. Considering that the migration of the deployment of retirement savings from annuities to more aggressive, efficient and better return products such as fixed income mutual funds might take some time; the government would be making a wise move by making annuity incomes tax free in the current budget.
