Mutual Funds

Retirement Fund: What makes it a must for Retirement Planning?

Created on 10 Dec 2020

Wraps up in 6 Min

Read by 4.1k people

Updated on 10 Sep 2022

When you are young and running, and earning a steady income, life becomes a chaotic mix of tiredness from that constant running and the consequential joy of seeing a stable bank balance from the regular income. But what happens when you reach an age when you are considered as a "senior citizen" of the society? 

Well, at that stage, your regular earnings stop but the needs, however, will never stop. So what can be done about this situation? How can one survive the phase of retirement? This where a retirement fund can come in as a saviour. After your retirement, it is the retirement fund, which will become the source of your continued, regular income.

There are some very good retirement funds that are trusted across the country and which give good returns. Here are a few of them:

  • Tata Retirement Savings Fund (Moderate Plan)
  • HDFC Retirement Savings Fund
  • Nippon India Retirement Fund
  • Tata Retirement Savings Fund (Progressive Plan)

*Disclaimer: It is advisable to do your own research before making any investments. All Mutual Funds investments are subject to market risks. 

Knowing the basics always helps, so let's get into the first basic question; what does a Retirement Fund mean?

Meaning of Retirement Fund

The other common name for the retirement fund is the Pension Fund. These funds provide a regular income flow after one retires. It becomes a source of income that helps in supporting the needs of the individual after retirement. To get started with the pension plans, the individuals need to start investing a certain part of their income in any pension fund that is suitable according to their needs. 

Do not mistake it with a bank where your money gets saved and you can check the balance. These pension plans are a type of investment. You invest in these funds, and your money is invested on your behalf in other return generating securities. The return that is generated becomes the annuity that you receive after retirement until your demise. 

The investments made using the pooled funds are usually invested in less risky options so that the returns are steady and the retired individual can receive their fixed benefits. And when one thinks about low risky investments, the best option is investing in government securities.

The reason why people start investing in pension funds from a young age is because of the high return it generates, which is enough for meeting necessities. For instance, generally, these funds offer approximately 11 per cent return which is better compared to other alternative investment options. 

Types of pension plans

The following are the types of pension fund plans currently existing in India:

  1. The National Pension Scheme is a pension fund backed by government securities. The investment mix (equity and debt) depends on the preferences of investors. In this scheme, the investor gets 60% in lump sum soon after retirement, and the remaining is given as annuity.
  2. The Retirement plan, where investment is made equally in equity and debt. Simply speaking, it is unit-linked. Slightly risky as equity is involved but also provides good returns during market appreciation.
  3. The last is the most common and popular one, investing solely in debt-related securities. The safest option with regular stable return accumulation.

How to receive the benefits?

Receiving that regular income post-retirement is not the only good thing about pension funds. They also come with two choices regarding how the investor wants to receive the benefit. The options are as follows:

  • The first option is to receive the entire accumulated wealth as soon as the investor retires. This enables the investor to get a nice financial cushion as soon as their stable income stops. However, it does take away the option of a regular income (monthly annuity) after retirement.
  • The second option is to choose a monthly annuity. The amount received would be of a fixed rate. One benefit of choosing this option is the inflation protection that is not available with the lump sum withdrawal option. Underinflation protection, the returns include the recent inflation rates so that there is no loss of value of the money.

Merits of Pension Funds

Since benefits were mentioned, let's get to know some major advantages associated with pension funds.

1. Low risky investment

As mentioned before, pension funds are a less risky investment option. Investors can choose to go for Mutual Fund Retirement Plans, as the basic nature of mutual funds, these plans have reduced risk with good returns. One can also choose funds that focus on government securities. And if looking for a balance between risk and returns, a mix of equity and debt can be a good option.

2. Provides long-term savings

Irrespective of lump-sum payments or monthly payments, the funds received from these plans are enough for any future investment endeavours.

3. Is like insurance

Pension funds have a very important feature that also acts as a benefit, and that is, that these funds also provide life insurance coverage. In case of any medical emergency, these plans will allow lump sum withdrawals to cover the expense. Also, during any financial crisis due to the demise of the plan holder before their retirement, the pension fund will provide financial protection.

4. Withdrawal flexibility

The investor has the option to choose between lump sum disbursal and monthly fixed-rate payments. If there is no financial emergency, it is better to opt for the annuity as it gives the best value of the money.

5. Inflation protection

One of the biggest merits of these retirement funds is that it protects against inflation. The majority of these plans have some kind of adjustments in returns based on the recent inflation rate. Some choose to pay back 1/3 of the accumulated wealth, and the remaining 2/3 is paid as an annuity. 

Modes of investing

Now that the concept of retirement fund (pension fund) is clear let's familiarize with how an investor can start putting their wealth into these funds.

In total, there are two methods of investing:

1. Systematic Investment Plan

Commonly known as the Systematic Investment Plan, and just as the term refers to; under this, the investor puts in a certain fixed sum monthly. This regular investment goes on till the final plan goals are met.

Benefit: Ideal for new investors as SIP creates a habit of investing among them. The fund pool creation overtime lets the beginners to invest without any financial constraints. Also, SIPs have less risk compared to one time investments.

2. One time investment

Under this, the investor puts in a considerable amount, if not the entire, of the plan goal. This lump sum investment is usually done by investors who have a high-risk tolerance and sufficient cash reserve.

Benefit: The advantage of this method is its higher returns against market volatility.

Tax Liability of Retirement Planning

The amount invested in the retirement plans is subject to tax-exempt under Section 80C. The maximum exempt amount is Rs. 1.5 lakh. 

Now the investment can be made to renew an already running pension plan or to buy a new one. 

When it comes to tax liability regarding the withdrawals, they are not tax exempted. Soon after retirement, 1/3 of the accumulated return paid to the investor is tax-free, but the rest that is paid through an annuity is not. The tax rate depends on the retiree's current tax rate during retirement. 

Conclusion - What makes it an ideal investment?

The most convincing part of these retirement funds is the stable financial support it provides during the retirement days. You will not have to worry about an income source as these funds cover that and also provide the benefit of life insurance coverage. 

The less risky returns promise fund availability during emergencies. So go ahead and secure your future by investing in retirement plans that suit your needs.

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Deb P Samaddar

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If people could be named after idioms, Deb would be called "I'm all ears." His brain is a storehouse, ever overflowing with derelict information. So, while most things he talks about are as useless as occasion-less greeting cards, everything he writes has the potential of bagging you multiple diplomas!

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