Retirement Plans

Retirement planning generally looks at answering three fundamental questions:

  • Goal setting – How much does one need on retirement?
  • Contribution and time horizon – How much amount one can save on regular basis or lump sum for the retirement goal?
  • Risk tolerance – How much risk one can take to reach the retirement goal?

 Retirement planning can be done by the following:

1) Annuities

 Annuities are popularly known as pension plans. An annuity is the systematic liquidation of an estate – monthly, quarterly, semi-annually or annually – designed in such a way that the investor receives payments periodically. The period during which premiums are paid for the purchase of an annuity is called the accumulation period and correspondingly, the period during which annuity payments are made is called the distribution period. The principal consists of the premiums paid by the person purchasing the annuity, and the interest or appreciation is the amount earned on these funds between the time they are paid and the time they are distributed.

 There are two basic types of annuities:

  • Immediate Annuity: It is an annuity that is always bought with a single premium. Here, one begins to receive payments from the annuity provider immediately. Payment will start immediately at the end of the month.

  • Deferred Annuity: It is an annuity that can be bought either through a lump sum single payment or through an installment plan. Here, one’s money is invested for a specified period of time until one is ready to begin taking withdrawals, typically upon retirement.

 On the basis of payments terms, an annuity can be classified as follows:

1a) Life Annuity

 It is an annuity paid through the life of the annuitant, till he/she dies, after which it stops.

 1b) Annuity Certain

 It provides a specified amount of periodical income for a specified number of years, without consideration of any life contingency.

 1c) Joint Life Annuity

 It is issued on two individuals, under which payments continue in whole or in part until both individuals die. It is also called joint life last survivor annuity.

 1d) Annuity with return of purchase price

 It pays back the purchase price of the annuity after a certain period or on death as per terms.

 4) National Pension System (NPS)

 Pension Fund Regulatory and Development Authority (PFRDA) has been established by the Government of India, Ministry of Finance on 10th October, 2003 to promote old age income security. National Pension System (NPS) is an initiative of PFRDA to regulate and develop the pension sector in India. It aims at building up a corpus sufficient enough to buy an annuity for their old age. The Government authorized PFRDA on 29th July 2008 to extend NPS on a voluntary basis to all citizens of India including workers of the unorganized sector. NPS is now available to all citizens of India with effect from May 1, 2009, other than Government employees already covered under NPS.

The NPS architecture consists of the NPS Trust, Central Recordkeeping Agency, Pension Fund Managers, Trustee Bank, and Custodian. PFRDA has appointed 22 Points of Presence (PoPs) and 6 Pension Fund Managers for offering NPS to citizens.

 The 6 pension fund managers appointed by the PFRDA are:

  • ICICI Prudential Pension Funds Management Company Limited
  • IDFC Pension Fund Management Company Limited
  • Kotak Mahindra Pension Fund Limited
  • Reliance Capital Pension Fund Limited
  • SBI Pension Funds Private Limited
  • UTI Retirement Solutions Limited

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