Retirement plan helps to bring financial security and regular cash flows to meet living expenses during their retirement life. But pension and medical facilities are available to a minuscule of people in India, post retirement. It is mostly limited to people like retired employees of central and state governments with some PSU’s.

As a result, vast majority of people who work in private sector or self employed have to plan themselves. For such retirees, it’s important to make the best use of their retirement corpus which would help them not only to keep tax liability at minimum but also provide a regular stream of income. 

Generally, people plan to retire at the age of 58 or 60, while the life expectancy is about 80 years. Hence, the challenge is to make sound investments which will give regular annuity income for at least 20 years after retirement.

In the present complex financial world, the contours of ‘risk’ are fast changing. Till a few months back, debt mutual funds and FMP (Fixed Maturity Plans) schemes of mutual funds were considered reasonably secure investments as they generate higher returns than bank fixed deposits.

But after the collapse of IL&FS, the contagion has spread to other NBFC companies and debt mutual funds. Many debt mutual funds have invested part of their corpus in the corporate bonds or commercial paper (CP) of IL&FS and other affected NBFC companies like DHFL. The repayment and interest payments on such corporate bonds and CP are being defaulted or postponed by these NBFCs.

As a result, the NAV (net asset value) of many debt funds have crashed anywhere between 6 to 53% during the last week of June 2019. It was reflecting the marked-down value of their holdings in DHFL and IL&FS bonds. Hence, retirees should avoid even a slightest risk, while making their investments.

Investment options

Retirees should invest their corpus in a basket of secure investments that will yield attractive and tax free annuities. Apart from putting part of their fund in bank fixed deposits, they can spread their balance retirement corpus in the following investment options.

Post Office Monthly Income Scheme (POMIS):

In this scheme, you invest a certain amount and earn a fixed interest every month. POMIS is a 5 year investment option with a maximum cap of Rs 9 lakh under joint ownership and Rs 4.5 lakh under single ownership.

The interest rate is set each quarter. It is currently at 7.8% per annum payable monthly. However, the interest is taxable. Those retirees whose total income is below the taxable limit can consider this investment option.

Tax-free bonds:

Tax-free bonds are issued primarily by government-owned institutions like Indian Railway Finance Corporation (IRFC), Power Finance Corporation (PFC), National Highways Authority of India (NHAI), Housing and Urban Development Corporation (HUDCO), Rural Electrification Corporation (REC) and NTPC. Retirees may take note of the following aspects of tax-free bonds before investing.

• They are long-term investments and mature after 10 to 15 years.
• One can invest in them if they okay with long lock-in period and do not need money.
• The interest is tax-free therefore, there is no Tax Deducted at Source (TDS). 

Pension plans of life insurance companies:

There are different pension plans offered by life insurance companies, including pension for lifetime for self, after death pension to spouse and/or return of corpus to heirs. 

On most of the pension plans, the annuity yield currently is around 6% per annum. 

Senior Citizens’ Savings Scheme (SCSS): 

This is a government guaranteed savings scheme with a tenure of 5 years. It  can be further extended for another 3 years on maturity. Senior citizens aged 60 years or early retirees under VRS can invest in this saving scheme. 

SCSS account can be opened in any of the authorized banks or post office branches. Present interest rate on SCSS is 8.7%. But the interest income is taxable. The upper investment limit is Rs 15 lakh. The interest rates on SCSS are revised each quarter.

Pradhan Mantri Vaya Vanadana Yojana (PMVVY)

This scheme is a pension scheme for senior citizens (60 & above) and it got introduced by Government of India on 4th May, 2017.  The main objective of this scheme is to give senior citizens regular income source i.e. pension. This scheme available for purchase, both online and offline through Life Insurance Corporation of India (LIC), till Mar. 31, 2020.

Term of policy is for 10 years and pension mode is monthly, quarterly, semi-annually and annually. PMVVY offers 8%-8.3% return for 10 years.

The investment limit has been recently increased to 15 lakhs which were 7.5 lakh earlier. Also, this limit is applicable for per senior citizen. In other words, if husband and wife, both are senior citizen then they both can invest 15 lakhs each.

Mutual Funds:

Though equity mutual funds may give higher returns, there may be risks linked to stock market movements. Debt mutual funds have now been exposed to considerable risks due to defaults by corporate bond repayments and liquidity crunch in the NBFC industry.