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Retirement Fund

A retirement fund or pension plan is a reliable and convenient investment option that enables individuals to fulfil their financial needs post-retirement. By starting an investment into a retirement fund at an early phase of life, people can ensure a stress-free life post-retirement.

The amount saved provides consistent financial assistance during years of retirement by providing a steady and stable source of income once you stop working. Moreover, retirement funds offer financial security and peace of mind, making it essential for monetary freedom post-retirement in the long run. ...Read More

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Retirement Fund

What Are Retirement Funds?

Retirement Fund
November 28, 2024

Table of Content

 

Retirement funds are mutual funds that allow investors to earn a regular income attaining the age of 55 or 60. These funds are also commonly known as pension funds for providing pensions to investors. The investor starts to receive a pension at the age of 55 or 60 and continues until their sudden death. Upon the investor’s demise, the remaining pension amount is transferred to the nominee. 

By investing in retirement funds, investors can plan their retirement journey, ensuring all their needs are met during their retirement days when they stop earning. Retirement funds are usually open-ended schemes and are categorised under 'Solution Oriented' mutual fund schemes.

Pension funds usually invest in debt instruments that include corporate bonds, government securities and money market instruments. All these debt instruments are, however, less volatile than equity funds and stocks. Additionally, retirement funds have a lock-in period of five years or till your planned retirement. Before this period, you are not allowed to withdraw the pension amount.

There are two different modes of investment in retirement funds – lump sum and SIP. Among these two, SIP or Systematic Investment Plans are preferable when you want to yield a high retirement income with a small investment every month. The lump sum mode is more appropriate when you have a large sum of cash to invest.

Features of a Retirement Fund

A retirement fund is a safety net designed specifically to provide financial assistance to individuals post-retirement. Investing systematically during the working phase of one’s life helps in the accumulation of wealth over time. Thus, retirement funds promote financial security and ensure a stable and secure source of income after retirement, helping retirees maintain a decent standard of living.

Here are the key distinguishing features of a retirement fund:

  • Lower Risks

    • Retirement funds have less risk in comparison with various types of mutual fund schemes, thereby making them an ideal source of funds for retirement. This category of mutual funds usually invests in low-risk securities such as government bonds, ensuring a steady flow of income post-retirement.

  • Withdrawal

    • The withdrawal process is a crucial feature of a retirement fund. Usually, the withdrawal facility is available to investors only after attaining a certain age. Withdrawals are allowed as lump sums, periodic instalments or sometimes a combination of both. If the invested amount is completely withdrawn after maturity, there are no penalties. Early withdrawals are not usually not permitted.

  • Lock in

    • Retirement mutual funds usually have a lock-in period of five years. This is quite higher than the lock-in period of three years applicable for ELSS. Because of the power of compounding, a higher lock-in period is beneficial. Moreover, if you choose to keep the invested amount for an extended period, it doesn't get affected by market fluctuations.

  • Hybrid

    • Investors are eligible to choose hybrid funds offered by the National Pension Scheme (NPS). By opting for this scheme, you can invest in both debt and equity markets as per your needs and preferences. Retirement funds enable you to withdraw about 60% of the invested amount during retirement and the remaining 40% to meet annuity payments. The amount you receive once your retirement fund matures is tax-free.

  • Retirement Planning and Life Insurance

    • Some retirement plans incorporates life insurance coverage, offering both financial security for retirement and protection for family members. This dual benefit includes accumulating a retirement fund while also serving as a safety net with a lump-sum payout in the event of the policyholder's death.  It's important to note that life cover is typically not included in annuity plans; individuals must opt for pension plans that specifically include life cover to benefit from this protection. This strategic approach ensures peace of mind by guaranteeing financial stability not just in retirement but also for the future.

  • Tax Benefits

    • Section 80C

    Section 80C1 allows deductions on investments made during the previous year in ELSS , Life insurance, National saving certificate, post office deposit, fixed deposit for 5 year or more and few other investment to reduce tax liability. Maximum deduction of Rs.1.5 lakhs a year can be claimed under this section.

    Section 80CCC

    This section allows policyholders to be eligible for tax deductions upon payment of premiums towards specified retirement or pension plans. The maximum deduction is available for Rs 1.5 lakhs a year. 

    Section 80CCD(1)

    In case where Employee is contribution made in pension scheme of central government or National pension scheme. Employee will can claim deduction subject to maximum limit as may be prescribed.

    Section 80CCD(1B)

    An additional claim of Rs 50,000/- is possible under Section 80CCD (1B)1 for NPS contributions by employee or other subscribers subject to prescribed limit.

    Section 80CCE

    This section limits the maximum deduction under sections  80C, 80CCC, and section 80CCD(1)1  to Rs 1.5 lakhs per financial year

    For taxpayers who have opted for New tax regime, no deduction are available under the above sections.

  • Options for Lump Sum or Annuity Payments

    • When opting for a retirement fund, you can choose between lump sum payouts and pension annuities. With a lump sum payout, you get all cash at once, while the annuity option provides you with a regular source of income post-retirement.

    Thus, to achieve financial security and stability, understanding both the pros and cons of these options is essential. The choice completely depends on your specific goals, needs, objectives and financial circumstances.

How Does Retirement Fund Work?

The two main components of pension plans in India are the accumulation and distribution phase. In the first phase, you must contribute consistently to your pension plan via premiums for a predetermined period. Upon maturity, you can start withdrawing the pension amount and choose to spend it at your convenience. This is also commonly known as vesting.

Upon vesting, there are two options available: to begin receiving the pension benefits or choose to withdraw funds and utilise the fund for purchasing an immediate annuity plan from the same provider. 

The main objective of a retirement fund is to provide a stable and consistent income after retirement. Furthermore, pension plans also assist you in accumulating funds for retirement while combating the effects of inflation. Investors are provided with the option of withdrawing their pension funds through SIP or lump sum to maintain consistent income after retirement.

How to Invest in a Retirement Fund?

Investing in retirement funds is a simple and straightforward process. You can start investing in this mutual fund directly through an Asset Management Company (AMC) or approaching other reliable platforms. 

Here is a detailed step-by-step process to follow to start investing in the best retirement funds in India:

Step 1: Register yourself and begin the KYC process for verifying your identity.

Step 2: Choose a retirement mutual fund scheme aligning with your retirement goals.

Step 3: Invest the amount you wish to via lump sum or SIP and continue monitoring the performance of the fund to check if it meets your desired expectations.

Reasons to Invest in a Retirement Fund

Investing in a retirement fund is crucial towards building a financial foundation in later periods. With this, investors can follow a disciplined approach and let their invested money grow through compounding. Alongside this, a retirement fund also provides financial protection against uncertainties, thereby allowing investors to meet unexpected medical emergencies and expenses.

Let’s explore the underlying reasons to consider investing in a retirement fund in more detail

  • Saving for the Long Term

    • Retirement funds are an appropriate savings scheme for the long term as it provides investors with financial stability after retirement. The main objective of these schemes is to invest in less risky securities in the market, assuring guaranteed and regular income after retirement.

  • Flexibility

    • Retirement funds offer flexibility in investment modes and plans. Unlike annuity plans, continuing investments in any retirement mutual fund is not mandatory. There are, however, some exceptional cases, such as the National Pension Scheme (NPS) or other government schemes with compulsory contributions.

    Moreover, retirement funds allow you to choose between a lump sum payment and a monthly pension, considering your financial plans and objectives in the long run.

  • Includes Insurance Coverage

    • Many retirement funds include insurance coverage, which protects your dependents in the event of your accidental death. Thus, your dependents can avail financial assistance during times of need and experience peace of mind without worrying about finances.

    Certain policies also allow for the withdrawal of a lump sum amount from a pension scheme to meet financial needs during times of emergency. This is one of the most beneficial features associated with pension funds. 

  • Shield Against Inflation

    • With retirement funds, you can withdraw about one-third of your accumulated fund post-retirement to address your financial needs. Moreover, choosing the right retirement fund allows for some compensation against inflation. The remaining balance in your account is utilised further to purchase an annuity.

    Choosing a monthly annuity allows investors to continue their investments and get regular returns by withdrawing a significant portion of the accumulated corpus.

  • Low-Risk Investment

    • Pension funds are one of the safest modes of investment with minimal risk. Investors who are risk averse often choose to invest their money in funds that invest in government-backed securities to earn a fixed return. Investors with higher risk appetite have the flexibility to invest in both debt and equity markets to yield higher returns in the long run.

Understanding the Lock-in Period for Retirement Funds

When opting for retirement funds, understanding about the lock-in period is crucial. A retirement mutual fund's lock-in period is the time before which investors are not allowed to withdraw the accumulated funds. With the National Pension Scheme, investors are allowed to exit at the age of 60 years. There are, however, certain exceptions and conditions for different retirement plans and investors.

For instance, investors are eligible to withdraw about 25% of individual contributions after paying premiums consistently for three years. This withdrawal can take place only under specific circumstances relating to illness, self-development, education, construction of houses and some other medical emergencies.

Because of the lock-in period of retirement funds, investors can ensure that they build a significant corpus amount. By preventing withdrawals of their invested amount at an early stage, investors get to build enough wealth that lets them enjoy a stress-free life after retirement.

Factors to Consider When Choosing a Retirement Fund

Here are the factors to consider while choosing a retirement fund:

  • Risk Appetite

    • Before starting to invest in a retirement fund, examine your own risk appetite. If you are midway in your career and are burdened with financial obligations, avoid taking excessive risks with investments. Instead, consider investing in endowment plans to enjoy guaranteed returns. Younger generations beginning their career can bear higher risk more easily and can choose plans like Unit Linked Investment Plans (ULIPs) for higher returns.

  • Investment Goals

    • Your investment decisions should always be in line with the specific reason for investing. For instance, if you plan to save money for your retirement, choosing a savings scheme designed specifically for accumulating a retirement corpus is a wise decision.

  • Investment Tenure

    • Before investing, investment tenure is one of the crucial factors to consider. The longer time frame you have, the more your wealth can grow due to the effects of compounding and your ability to take more risks. Let’s illustrate this with two instances.

    If you are in your 20s, you have a long investment tenure, and you can invest in ULIPs, retirement mutual funds and even equity funds. However, if you are approaching retirement age, you should stick with low-risk options.

  • Choosing a Plan with a Guaranteed Income Option

    • No matter how much you are capable of earning in your entire career, regular savings are crucial to have a source of income after your retirement. While going through your options, you can choose guaranteed annuity products as they assure you with a stable income. This ensures you and your family members have financial freedom and peace of mind after your retirement.

Retirement Fund withdraw tax Rules

If you withdraw funds from the invested amount before maturity, it will be taxable. Because the money is distributed in the form of an annuity, tax will be imposed considering the existing rates only. 

Any payment received in commutation of pension as a lump sum on vesting (maturity) is exempt under section 10(10A)(iii) of the Income-tax Act, 19611, subject to fulfillment of various conditions under the current income-tax law. Regular annuity received under the annuity plan will be taxable in the hands of the recipient.

Final Words

To summarise, by opting for a pension fund or retirement fund, you can ensure that you secure your post-retirement life financially. This income can serve as the sole source of income for a retired individual in the later phases of your life. Moreover, due to the many different retirement plans available in the Indian market, it’s fairly easy to find the right plan based on your needs and preferences.

Thus, pension plans play a significant role in securing your financial stability during your retirement years. Choosing the right fund provides you with decent returns and secures your retirement days.

FAQs on Retirement Funds

1. What is best for retirement fund?

The best retirement fund depends on your financial goals, tenure and risk appetite. It is recommended to target the desired funds for simplicity or to consult with any financial advisor to monitor your portfolio for achieving growth during years of retirement. 

2. Which fund is best for a retired person?

For any retired individual, opting for the Senior Citizen Saving Scheme will be the most beneficial. 

3. How to start a retirement fund?

To start a retirement fund, here are the mandatory steps to follow:

  • Set your retirement date
  • Decide your financial goals after retirement
  • Make a rough estimate of your monthly expenses 
  • Factor in the effects of inflation on expenses 
  • Use a retirement calculator to find out how much you need to save
  • Compare different retirement funds available in the market
  • Start investing

4. Do retirement funds have a lock-in period?

Yes, retirement funds usually have a lock-in period of 5 years or more. 

5. Is it good to invest in a retirement fund?

Yes, it is beneficial to invest in a retirement fund to build a strong financial foundation, secure your future and avail tax benefits. Starting to invest at an early age allows your investment to grow over time and experience a comfortable retirement journey.

Related Articles

References:

https://www.etmoney.com/mutual-funds/featured/retirement-funds/13

https://groww.in/mutual-funds/solution-oriented-schemes/retirement-funds

https://groww.in/mutual-funds/solution-oriented-schemes/retirement-funds

https://www.hdfclife.com/retirement-and-pension-plans/lump-sum-vs-annuity

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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  1. Tax benefits are subject to conditions under Sections 80C, 80D, Section 10(10D) and other provisions of the Income Tax Act, 1961.

  2. Provided all due premiums have been paid and the policy is in force.

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