As India’s population ages and life expectancy increases, the need for retirement planning has become paramount. While building a substantial retirement fund is essential, ensuring a steady flow of income during retirement is equally crucial. The shift from saving to managing retirement funds requires thoughtful strategies for stable income, utilising a mix of financial instruments and plans to guarantee both stability and growth. This article delves into the various options available in India to help retirees secure a stable income throughout their retirement years.

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National Pension System (NPS)

The National Pension System (NPS) is a comprehensive retirement savings plan introduced by the Indian government. It is designed to provide a secure financial future, allowing individuals to contribute to a pension fund while working, with a portion of the savings accessible upon retirement. A notable aspect of the NPS is its adaptability: investors have the choice between equity, government securities, and corporate bonds, depending on their risk tolerance. Recent updates have made the NPS more appealing by offering better tax benefits, enhancing its status as a long-term investment vehicle. By 2024, the NPS also allows for partial withdrawals for specific needs such as medical emergencies or children’s education, adding a layer of liquidity to retirement savings. Tier 1 Account opening is mandatory and Tier 2 Account is optional. At retirement, up to 60 per cent of the corpus can be withdrawn tax free and the remaining 40 per cent of the corpus is used to purchase pension.

Partial withdrawals are allowed after three years, up to 25 per cent of own contributions.

For premature exits due to medical and emergency conditions, 29 per cent withdrawal is possible and 80 per cent of the corpus must be used for annuity purchase.

Systematic Withdrawal Plan (SWP)

The Systematic Withdrawal Plan (SWP) is a favoured strategy for retirees aiming for a consistent income from their mutual fund investments. By establishing an SWP, investors can withdraw a fixed sum monthly, quarterly, or annually—from their mutual fund holdings. This method not only aids in managing regular expenses but also promotes capital growth, as the remaining funds continue to be invested. SWPs offer the flexibility to adjust the withdrawal amount and frequency, making it easier to adapt to changing financial needs or market conditions. Using the Bucket Strategy for meeting short, medium and long term needs a retirement withdrawal strategy can be curated by the financial advisor. Further, this is one of the most tax efficient and liquid options available for meeting regular income needs and can be used pre or post retirement. This approach is particularly advantageous for those who seek to balance investment growth with income generation.

Employees’ Provident Fund (EPF) and Superannuation

The Employees’ Provident Fund (EPF) is a compulsory retirement benefit scheme for employees in India, where both the employee and employer contribute a portion of the salary to the EPF account. Over time, this fund accumulates interest and can be partially or fully withdrawn for specific purposes or at retirement. In addition to EPF, many employers provide a superannuation fund, which offers an additional retirement benefit in the form of a lump sum payment upon retirement. The combination of EPF and superannuation can constitute a significant part of a retiree’s financial portfolio, ensuring a stable income base. After Budget 2021, any contribution that exceeds Rs 2,50,000 per annum towards EPF is taxable to the employee as a perquisite.

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Gratuity

Gratuity is another key element of retirement benefits in India, typically given to employees who have completed a minimum of five years with an organization. This one-time payment is based on the employee’s last drawn salary and years of service. For many, gratuity acts as a financial safety net during retirement, contributing to the overall retirement savings. The recent increase in the maximum limit for gratuity payments under the Payment of Gratuity Act, 1972, has further emphasized its importance in retirement planning.

Annuities

Annuities are financial tools designed to provide a secure income for life. For older adults, annuities offer a reliable and consistent source of money flow, which can be especially beneficial for those worried about their savings running out. There are different types of annuities available, including immediate annuities that start paying out immediately, and deferred annuities that begin after a certain period. The Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a government-supported program that provides assured returns for the elderly, including a yearly pension and a 10-year investment plan. These programs are instrumental in maintaining financial stability and peace of mind during the retirement years.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a long-term savings plan with tax advantages, a popular choice for retirement planning. With a commitment period of 15 years and the possibility to extend it in 5-year segments, the PPF offers a safe and attractive interest rate. The interest earned is tax-free, and contributions are eligible for deductions under Section 80C of the Income Tax Act. This scheme is suitable for those looking for a conservative investment with guaranteed returns, contributing to a stable retirement fund. This is one of the only investment options that falls under EEE or Exempt Exempt Exempt That is tax benefits at the time of investment, interest earned is tax free and compounded quarterly and maturity amount is also tax free.

Senior Citizen Savings Scheme (SCSS)

The Senior Citizen Savings Scheme (SCSS) is a government-sponsored investment plan tailored for people aged 60 years and older. It presents a range of benefits:

• Annual interest rate: SCSS usually provides a more generous interest rate than standard savings accounts, making it a compelling choice for seniors.
• Investment cap: Effective from 2024, participants are permitted to put in up to Rs 30 lakh into SCSS.
• Interest disbursement: Quarterly interest payments ensure a steady flow of income for retired individuals. The interest received is subject to TDS and is taxable.
• Deductions: Contributions to SCSS qualify for tax breaks under Section 80C of the Income Tax Act, subject to a limit.
• Duration: The programme spans a five-year period, with an additional three-year extension after the initial term.
• Security: SCSS, being backed by the government, ensures a high degree of investment safety.
• Early withdrawal penalties: Early deductions may lead to penalties, depending on the circumstances.

SCSS is an especially advantageous option for seniors in search of a secure investment avenue that offers consistent returns and tax advantages.

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Conclusion

Retirement planning in India demands a holistic approach that makes use of different financial instruments to ensure a steady flow of income. Investments in NPS, EPF, PPF, and SCSS, and strategies like SWP, will help individuals create a robust plan that caters to tax and inflation-adjusted cash flow needs and long-term economic stability. It’s important to highlight that upon reaching actual retirement, it’s necessary to conduct a detailed consolidation and restructuring of various holdings. This step includes evaluating all owned assets and sources of income, adjusting investments to suit post-retirement risk appetite and cash flow needs, amalgamating different accounts for simpler oversight, and setting up a definitive strategy for withdrawing funds from various sources.

Additionally, it’s critical to continually monitor and tweak the sources of income during retirement. This continuous effort guarantees that the retirement strategy remains effective under various economic shifts, personal situations, and financial demands. Retirees ought to regularly check their sources of income, investment returns, and expenditure habits, adjusting as needed to ensure financial health and achieve changing objectives. As the environment of retirement evolves, it’s essential to stay up-to-date and modify strategies to achieve a satisfying and productive retirement. Consulting with a certified financial advisor and a SEBI (Securities and Exchange Board of India)-registered investment advisor can prove to be extremely beneficial in making informed choices and securing financial security throughout the retirement period with teaks wherever needed.

The author is the founder, managing director, and chief financial planner at Dilzer Consultants Pvt. Ltd.