Monday, February 29, 2016

Time to Re-look at your Retirement Planning!

Time to re look at your Retirement Planning!
Out of various ways of saving and investing the retirement corpus, the popular ones are EPF (Employee Provident Fund), PPF (Public Provident Fund), newly launched NPS (National Pension Scheme and Pension plans by Life insurance companies.

Recent announcements including announcements in the #Budget2016 will bring upon the need to rejig your retirement portfolio. Here are some important changes being done:

1.     EPF (Employee Provident Fund):

Till now-

1.      Full withdrawal of EPF corpus was allowed when a person was changing or leaving the job.
2.      Age of retirement, at which a person could withdraw the full amount was 55 years. The full corpus was Tax free.
3.      Any withdrawal before 5 years was taxable as per the individual’s tax bracket. But the withdrawal after 5 years was Tax free.

Current changes-

1.      Only partial withdrawal restricted to the share of employee’s own contribution and the interest there upon is allowed.
2.      The age of retirement has been changed from 55years to 58 years.
3.      One major change is in taxability of the corpus. In his speech today, Finance minister said that in order to bring uniformity in the pension aka retirement schemes;

he said ‘In case of superannuation funds and recognised provident fund schemes  including EPF, the same norm of 40% of the corpus to be tax-free will apply in respect of corpus created out of contributions made after 1st April 2016.

Which will mean that rest 60%  of the corpus will be taxable at the time of withdrawal.

Points to ponder upon-

1.      Discontinuation of employment can happen due to many reasons. Some are voluntary like, taking a sabbatical, starting own venture or further studies. Also some reasons are non-voluntary like, health conditions, disabilities or layoffs.

Contribution to EPF by the employer is part of CTC (cost to the company) or the overall compensation package of the individual. By blocking this amount till retirement, an individual will face the forced liquidity crunch at the time of need.

2.     Many individuals fall in the highest Tax bracket by the time they retire. As per current proposal, 60% of their corpus will be taxable as per the tax bracket then.

Retirement is the time when people lose the regular income. A lumpsum corpus help them plan income for their non-earning years. Getting 30% less amount at that time will certainly disappoint people.     

2.     NPS (National Pension Scheme):

Till now-

It was mandatory to use 40% of the corpus to buy annuity. Rest 60% could be withdrawal as Lump sum.
And both annuity and lumpsum withdrawal were taxable as per the individual’s tax bracket.

Current changes-

As per Finance minister’s speech today, he said ‘I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of the National Pension Scheme.

Which will mean: 40% for buying annuity which will be taxable as per the tax bracket of the individual. 40% will be tax free corpus. And rest 20% will be taxable, again as per the individual’s tax bracket.

Points to ponder upon-

NPS could not attract individuals as an investment vehicle despite extra Rs 50,000/- tax deduction. The reasons were several.

Firstly, the returns from NPS are not guaranteed and they work like any other mutual fund, which carry market risk.

Secondly, no withdrawal is allowed from the scheme before retirement, hence liquidity is compromised.

Thirdly, NPS force to buy annuity at the time of retirement which means inability to use money as per your own requirements.

Lastly it was fully taxable (annuity + lumpsum) means less income in hand at the time of retirement.

Merely decreasing the Tax liability to some extent does not take away the remaining apprehensions about the scheme.

3.     PPF and other Pension plans:

No change has been announced regarding these schemes.

On one hand Government is trying to make NPS attractive, on the other hand the current measures have stolen away the sheen of EPF.

Changes to Embrace:

In the current scenario it is imperative to bring some changes in the retirement planning.

1.      Do not depend upon one product/scheme alone. Diversify your retirement portfolio among various available schemes.

2.      Make use of PPF as part of retirement planning (at least as of now it is the only product which is tax exempt).

3.      Do not plan your big ticket expenditure like house down payments, seed capital for startups etc depending upon your EPF. Get the actual in hand amount calculated before you plan any use of it.

4.      In case of change of job, transfer your EPF and do not with draw it.

5.      If you are comfortable and your situation allows you to take market risk, choose direct Mutual funds over NPS. They will ensure both liquidity and tax free income.

Government may be trying to bring uniformity among the products, but the usefulness of these products is becoming questionable now!
Personal finance till so far it was all about meager income, low consumerism, guaranteed jobs and hardly any investment options. The entire scenario has changed now, both Globally and Locally. Complexity, agility and no guarantees call for dedicated discussions on the intricacies of the personal finance and role it plays in people’s lives.

 A time when demographic dividend is hailed as an important aspect of the economic growth, making people unhappy and stressed will only make them less productive! 

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