Khota Paisa

The New Pension Scheme (NPS)

Posted in Retirement Planning by khotapaisa on February 5, 2010

If you are looking for market linked pension plan, you would typically consider various ULIP based pension plan. You would then be advised to select a low cost ULIP. But before you decide, consider the New Pension Scheme (NPS) launched a few months back. I would try to sumarize the NPS in short here so that you get a fair idea whether it makes sense for you or not.

Features :

  • Equity based pension plan with minimum 6000/- pa contribution.
  • Account can be opened at various banks & other contact centers.
  • Can select your equity exposure upto a max of 50%.
  • Type I and type II account available. Type II allows you to withdraw money anytime unlike type I. But a type I account is required for a type II account.
  • Available for everyone i.e. no bank account or PAN no. required.

What’s good :

  • A simple, no-nonsense pension plan for the masses.
  • Very-very low cost.
  • High level of customization available for investor.
  • Facility fo choose, change your fund manager.
  • Can use the same account throughout India.
  • One way transfer of money from type II account to type I account allowed.
  • Most investor friendly equity-linked product in market.

What’s bad :

  • Maximum equity exposure limited to 50% thus limiting your possible gains.
  • No pre-mature partial/full withdrawal facility.
  • On maturity (when your reach 60), you can withdraw a max. of 60% of your corpus. Rest must be used to buy annuity.
  • Maturity proceed (max 60% of corpus) is taxed on withdrawal.
  • No loan facility.

Overall, it’s a revolutionary product. At first, you may find various problems but most of them are designed to make it a pure pension plan (long term). Some of the major drawbacks include the tax treatment, though it is expected that in coming times this will be rectified. With introduction of type II accounts, the problem of no-withdrawal has been solved. Some may see the limit of 60% for withdrawal as a big problem but I guess it has been kept to prevent you from misusing (using it for anything other than retirement) your retirement fund. In theory this may not look good but, in practice, it is a boon for the investor. 
So if you have opted for NPS, you have selected the most investor friendly product in the market. If you have not, just wait for some time (a year or two) till the tax issue is resolved.

Making A Post-Retirement Portfolio

Posted in Retirement Planning by khotapaisa on August 23, 2009

Consider a person who has recently retired at the age of 60. All his savings, provident fund, gratuity etc put together provide him with a corpus of 45 lakhs. Staying in his own house, he has no dependent other than wife. The couple have the following expenses to cover.
Monthly Household Expense : 10,000/-
Yearly Travel Expense : 25,000/-
All the expenses total to 145,000/- per year.

Goals
 1. Medical Emergency – They should have a medical emergency cushion of 5-10 lacs. This can be provided by a combination of medical insurance & medical emergency fund. Even if they can afford a full 10 lacs S.A insurance, they must have their own medical fund. An insurance of 5 lacs with a 3 lacs medical fund would be a good starting point.
2. Emergency Fund – For retirees, the size of emergency fund should be 1-3 years worth of expenses. This would mean keeping aside around 2 lacs in this case covering 1+ years of expense.
3. Monthly Cash Flow – To cover the expenses, they need to keep money in combination of Post office MIS, Bonds, Senior citizen saving scheme etc.

Portfolio
Looking at the goals listed above, the portfolio may look like this.

Purpose : Medical Fund
Amount : 3 lacs (with 5 lacs insurance)
Invested in : A combination of long term debt fund & fixed deposits.

Purpose : Emergency Fund
Amount : 2 lacs
Invested in : A combination of long term debt fund & fixed deposits.

Purpose : Cash Flow
Amount : 1.5 Lacs/year
Invested in : Assuming a safe return of 6%, they need to invest atleast 25 lacs in safe instrument. They should start with putting 9 lacs in Post office MIS (joint account). They can then put next 15 lacs in senior citizen saving scheme. They can further put 6 lacs in debt funds. With the 30 lacs invested towards providing cash flow, the couple can decide to put the remaining 15 lacs in combination of long term funds, government bonds, fixed deposits etc. They may additionally invest (preferably less than one third of the remaining 15 lacs) in balanced fund/equity diversified fund depending on the comfort level.

How Much You Need To Save For Retirement?

Posted in Retirement Planning by khotapaisa on July 23, 2009
retirement tableNote: The expected average return on your investment is assumed to be 10%.

For all those who are interested in retirement planning, here is the table to make life easier for you. The table below gives approx. monthly saving required to cover 20 years of your post retirement life. Please note that the required monthly saving stated in the table is for every 10,000/- of your current expense.
E.g. if you current monthly  expense is 25,000/- and you plan to retire after 20 years, at 7% inflation, you need to invest 10741 x 25000 / 10000 = 26,852/- every month (Refer to the table below for the figure 10741 used here).
The expected average return on your investment is assumed to be 12%.

retirement table

Note : For your calculation, you should preferably use 7 or 8% inflation as this is the average historical inflation as per RBI data.

Comparison of Pension Plans

Posted in Retirement Planning by khotapaisa on June 30, 2009

A lot of people want to know as to which is the best pension plan. So, I did a comparison of few ULIP plans available in the market. Based on the brochure available on the insurer’s website, I calculated the fund value of the plan (@10% returns) for a fixed premium. Then I ranked the plans based on the fund value. The plan with higher ranking here is cheaper and hence better (on cost basis). The plans that I compared  are –

Birla Sunlife Flexi SecureLife II (seems to have been withdrawn)
– HDFC Unit Linked Pension II
– ICICI Pru LifeTime Super Pension
– SBI Life Horizon II
– Bharti-AXA DreamLife Pension

Here is the how the funds fared.

pension-plan

The difference in fund value (hence ULIP cost)  for the first three funds was not big but the fund ranked 1 gave ~10% more corpus than no. 5.
I guess you can select any of the top three plans here. But, please remember that this comparison is only on the basis of ULIP cost (cheaper the better). Though, the fund performance should also be factored in while selecting the plan.

Note:

– All the calculations were based on data available in the respective product brochure.

– The calculation didn’t consider mortality charges.

– The ranking didn’t use the illustration available on the insurer’s website because of lack common standard for illustration. Some of the insurers don’t even provide online illustration.

– There may well be better options in market, as I didn’t analyse all of them.

Update :
I have reviewed LIC Market Plus I pension plan. You can read the review here.