Sarah Jones invested in the Life Insurance Corporation of India's pension plan, putting away Rs 10,000 year after year whereby she could avail of a tax break under section 80 CCC of the Income Tax Act.
However, when she retired last May, she hardly had much to live on for her golden years. Unfortunately as a school teacher, she was not entitled to any pension either.
Building a retirement kitty requires long-term financial planning. The current limit of Rs 10,000 is highly inadequate to provide for any substantial post-retirement income.
Take Jones' example, she had been saving since she was 35 years old till her retirement at the age of 60. Today, she would be entitled to an annuity of about Rs 5,300 a month.
Hardly much when one considers the cost of basic necessities like food, clothing and medicine. In the next 20-odd years that Jones is expected to live for, taking the inflation rate, the amount is miniscule.
In essence, she ought to have ensured post-retirement, a monthly pension of about Rs 25,000. Of course, that would have meant saving at least Rs 45,000 a year for 25 years.
Today, while talks of pension reforms are much in the news as political parties deliberate on how much should be the foreign direct investment allowed, the fate of the Jones and other similar Indians leaves a lot more to be desired.
About 11 per cent of the working population today has actually participated in a savings plan for old age. As life expectancy is rising and expected to cross 75 years, retirement at 55 or 60 means huge fund requirements to take care of one's old age.
The insurance industry has been asking for a higher exemption under section 80 CCC for the last four years, but to no avail. The first to make a proactive move however, has been ICICI Prudential Life Insurance Company, which has introduced a new retirement plan -- Golden Years.
The product offers individuals flexibility and at the same time, affords them their much wanted "tax incentives" for long-term savings.
Unlike a regular pension plan, this new product allows for five payout options at the vesting stage. More importantly, it offers tax benefits up to Rs 1,00,000 under section 80 C in terms of the premium insurance paid, as well as total exemption from tax under section 10D in terms of the payouts. Of course, the situation could change should the government decide to adopt the proposed tax structure -- exempt, exempt and tax.
So how does it work? Any individual within the age bracket of 18 to 65 years can make annual premiums contribution and choose to invest in one of the four investment funds. One can even limit the number of years one wishes to pay the premium, provided he has paid for a minimum period of 5 years should one's age be 45.
The lesser the number of years one contributes to the pension plan, the greater the minimum premium one has to invest. The minimum annual premium would thus work out to Rs 60,000 in the case of 5, 7 and 10-year premium paying terms.
Regular pension plans at current annuity rates, would afford a 45-year old individual starting to stash away for his pension, a monthly annuity of just Rs 1,500.
Hardly enough to pay for his board and lodging, forget the rising medical costs, or that extra luxury he would have liked in his old age. Ideally he would need to save at least Rs 75,000 per annum at that stage (45 years) if he were to retire on a monthly sum of Rs 12,000.
The amount rises to as high as Rs 1,00,000 if the individual chooses to pay for just 3 years. This means an individual can start saving for old age much later in life but would have to invest that much more! What's more, in addition to a risk cover attached to the pension plan, one can also avail of accident and disability benefit as well as critical illness riders.
Perhaps of greater interest would also be the fact that on retirement, unlike in the case of a typical pension plan, one can choose to take out the entire amount without having to pay any tax.
In a regular pension plan, one can at most take out 33 per cent of the amount and the balance has to be invested in an annuity product. In addition, an investor could also avail three other payout options including structured benefit payments, wherein the payments are received on a quarterly basis for specified period.
Alternatively one can opt for an annuity product and ensure payment for life, or decide to structure the payout in any fashion best suited to an individual.