Planning ahead

The pandemic has recast people’s priorities significantly. Many don’t want the logistic hassles of going back to the workplace, and if they have to, not six days a week.

As much as they have started valuing ‘quality of life’, they are getting cautious with their money, risk appetites having been curbed by the uncertainty. Much thought, and action, has gone into savings rather than investment, or at least into safer investments.

Interest in pensions

An interesting uptrend is in pensions. Leave alone the government employees who have the National Pension Scheme (NPS) and the corporate employees who have this and other options through their workplace, individual citizens seem to have waking up to pensions. Of course, a significant part of this attraction could be the additional tax savings that NPS gives for contributions up to ₹50,000 under Section 80CCD (1B) of the Income-tax Act, 1961 over and above the benefits for specified investments of up to ₹1.5 lakh under Section 80C.

Overlooking the tax benefits, a good retirement savings plan is a vital part of your financial planning. A pension account and a pension policy are its essential components. Keep in mind the depressing fact that pensions are taxable when you plan how to go about this investment. The advantages of NPS are well-known. Starting early means you accumulate a decent corpus which is invested in the capital markets over the years, smoothening the entry cost. NPS is a defined contribution system, which means your contribution is defined. This is the opposite of government pensions of the past, and many corporate pensions, which had a defined benefit system where the quantum of the pension was specified with no links to your contribution.

Under the NPA, your ongoing contributions are invested in a fund option of your choice ranging from pure debt to pure equity. You can switch at will, literally, the charges and costs of the system are low and you can open an NPS account and contribute and manage it including switching service providers and fund options online. On a pre-defined vesting date, a specified portion of the corpus in your NPS account can be commuted without tax and the rest, the bulk of it has to be applied towards buying an annuity policy from any life insurance company. Again, of your choice

Multiple options

Independent of this, you have a plethora of options for creating your own pension by buying an insurance policy directly. The annuity policy, which I referred to above, gives you an annuity, or a periodic pension, against a payment of premium. You can accumulate this premium over time or make a one-time payment. The former is called a deferred annuity and the latter, an immediate annuity.

But why? An annuity policy, or a pension policy, covers the risk of living too long and is the opposite of a life insurance policy that covers the risk of dying too soon.

Living ‘too long’ has become common and the retirement years can be fraught with difficulties since the days of earning a regular income are behind you. This is where planning an annuity policy pays off.

The challenges in applying your mind to this investment is that for one thing, it all seems too far away in the future. But we see examples of senior citizens in our daily lives where doctor visits outnumber social calls and expenses loom against reduced incomes.

The other potentially off-putting factors include the ‘low’ return on the investment and the fact that the annuity is taxable.

While other retirement income and risk protection plans can be in place – maybe income from rental properties, fixed deposits and bonds and of course equity and mutual fund investments that may be paying off – the annuity outlives them as it covers all the rest of your life. Today that can be 30 to 40 years after retirement. So, when the money you pay as premium is for that risk and you would be confusing issues to consider it a principal that should yield a return.

The other thing is annuity income is added to your taxable income. It’s a fact of life, maybe things may change later, but remember, your premium has already earned you a tax break in the case of a deferred annuity and there is also a tax-free commutation.

As for the fact that these breaks are not available for an immediate annuity, take it as the cost of a deferred decision, but do make that investment to enhance your old age financial peace.

(The writer is a business journalist specialising in insurance & corporate history)