Retirement marks the beginning of a new phase in an individual's life. It's a transition from a lifetime of work to a time when one can relax, spend time with the family and pursue other interests. Not only this, retirement also marks a transition in one's finances. With a regular stream of income no longer available, the savings made over one's working years now have to provide for all his needs.
Given the kind of challenges that retirement can throw up, it isn't surprising that any financial planner worth his salt would recommend that retirement planning should be given its due importance and started as early as possible.
However, there is another (often ignored) set of investors - retirees. Individuals who are already retired and need to get invested now. For such investors, capital protection and liquidity are priorities. In this article we profile some investment avenues that retirees can consider adding to their portfolios.
Senior Citizens Savings Scheme
As the name suggests, SCSS is an investment avenue meant exclusively for senior citizens. The scheme defines senior citizens as those who are above 60 years of age; subject to the fulfillment of certain conditions, individuals who have crossed 55 years of age and have retired under the voluntary retirement scheme can also participate in the scheme. The minimum and maximum investment amounts are Rs 1,000 and Rs 1,500,000 respectively. This scheme runs over a period of 5 years and offers a return of 9.0 per cent per annum.
Liquidity
Given that this scheme is designed for senior citizens, it fares well on the liquidity front. Interest is paid out on a quarterly basis on 31st March, 30th June, 30th September and 31st December. Investors are also allowed to prematurely liquidate their investment at any time after the expiry of 1 year, however, the same entails bearing a penalty in the form of loss of amount invested. So if the withdrawal is made after 1 year but before the expiry of 2 years, an amount equal to 1.5 per cent of the initial deposit is deducted. Similarly, if the account is closed after 2 years, an amount equal to 1.0 per cent of the initial deposit amount is deducted.
Taxation
Investments in the scheme are eligible for tax benefits under Section 80C of the Income Tax Act. However, the interest income is fully taxable and subject to tax deduction at source (TDS). Investors whose tax liability on the estimated income for the financial year is nil, can avoid TDS by furnishing a declaration in Form 15-H or Form 15-G as applicable.
Post Office Monthly Income Scheme
Since getting a regular income is important for retirees, POMIS is another investment avenue that they can consider. POMIS is operated from post offices and offers an assured monthly income. The minimum investment amount is Rs 1,500 and the maximum are Rs 450,000 and Rs 900,000 for single and joint accounts respectively. The scheme runs over a 6-Yr period and offers a return of 8.0 per cent per year. Also investments (made after December 8, 2007) are eligible for a 5.0 per cent bonus (of the initial amount invested) on maturity.
Liquidity
Expectedly, POMIS fares well on the liquidity front. Apart from the monthly interest payouts, premature withdrawals are permitted after 1 year from the date of investment. However, 2.0 per cent of the initial amount invested is deducted as penalty, if a premature withdrawal is made after 1 year but before 3 years from the investment date. This penalty is reduced to 1.0 per cent if the amount is withdrawn after 3 years.
Taxation
Investments in POMIS are not eligible for any tax benefits to investors; also, the interest income is taxable.
Post Office Time Deposit
POTD is essentially a fixed deposit from the small savings segment. Investors can invest a minimum of Rs 200; there is no upper limit for making investments. The scheme provides investors a wide range of options in terms of investment tenures.
In line with their requirements, investors can opt for 1-Yr, 2-Yr 3-Yr or 5-Yr POTDs. But it should be understood that only 5-Yr POTDs are eligible for tax benefits under Section 80C. Similarly, the returns range from 6.25 per cent per annum (for the 1-Yr POTD) to 7.50per cent per annum (for the 5-Yr POTD) on a quarterly compounding basis.
Liquidity
POTDs fare moderately on the liquidity front, thanks to the annual interest payouts. Premature withdrawals are permitted after 6 months from the date of deposit; however, the same entails bearing a penalty in the form of loss of interest. Finally, any excess interest paid is recovered from the principal amount and the interest payable.
Taxation
Investments in 5-Yr deposits are eligible for tax benefits under Section 80C of the Income Tax Act. The interest payouts are taxable.
8% Savings (Taxable) Bonds 2003
Issued by Government of India, these bonds have an investment tenure of 6 years and offer an assured return of 8.0 per cent per annum. Investors can choose between the half-yearly and the cumulative interest payment options. The bonds are issued for a minimum amount of Rs 1,000 and there is no maximum investment limit.
Liquidity
Expectedly, the half-yearly interest payout option will find favour with retirees over the cumulative payout option. However, it must be noted that premature encashment is not permitted on investments made in the bonds.
Taxation
Interest income from the bonds is fully taxable. Any interest credited or paid on them (on or after June 1, 2007) will attract TDS if the interest amount exceeds Rs 10,000 for the financial year.
Fixed Deposits
Another investment avenue that retirees must consider are fixed deposits offering a monthly income option. Like conventional fixed deposits, they offer assured returns, but the interest payout is done every month. At Personalfn, we prefer fixed deposits, which are 'FAAA/equivalent' rated, as it signifies the highest degree of safety. Also, given that most fixed deposits are known to offer a higher interest rate (generally 0.50 per cent more than regular rate) to senior citizens, this avenue becomes more attractive for retirees.
Liquidity
Premature withdrawal is generally permitted only after completion of 3 months from the date of deposit. Also withdrawal of deposit before the completion of the stipulated tenure entails a loss of interest for the investor.
Taxation
Investments in fixed deposits are not eligible for tax benefits; also, the interest income is taxable.
Monthly Income Plans and Fixed Maturity Plans
MIPs and FMPs are investment avenues from the mutual funds segment. Unlike the investment avenues discussed earlier, MIPs and FMPs are market-linked in nature, hence, they do not offer assured returns.
MIPs typically invest 15-20 per cent of their corpus in equities while the balance is invested in debt instruments. Investors can choose between the dividend (monthly, quarterly, half-yearly and annual) and the growth options. However, it should be noted that while the intention is to declare dividends, there is no certainty; furthermore, there is also no guarantee of capital preservation.
FMPs invest in debt instruments and target a pre-defined return. To achieve this, they lock-in the same at the time of investing and stay invested till maturity. In turn, investors who stay invested in the FMP till maturity are virtually assured of clocking the given return. It should be noted that the actual returns could vary from the indicated ones; also FMPs are exposed to credit risk i.e. the risk of loss due to non-payment of the principal or interest (coupon) or both.
What should investors do?
Retirees can consider adding any one or more of the above investment avenues to their investment portfolios based on their needs. Also, the above list is not an exhaustive one. For instance, a retiree who has his finances in place (i.e. whose everyday needs are provided for and has a sufficient investible surplus) can even consider investing a smaller portion of his monies in well-managed diversified equity funds.
The key lies in understanding one's needs and then forming a portfolio based on the same. Also opting for the services of a qualified and experienced financial advisor would be a prudent decision.
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