1. How to invest your retirement funds

How to invest your retirement funds

Identifying risk-free investments with guaranteed returns will ensure a regular source of income

By: | Published: October 31, 2016 6:18 AM
Park some part of your retirement funds in the Senior Citizen Savings Scheme (SCSS) available in banks and post offices where you can earn higher interest rate (PTI Image) Park some part of your retirement funds in the Senior Citizen Savings Scheme (SCSS) available in banks and post offices where you can earn higher interest rate (PTI Image)

After retiring from an active working life, the ability to take risk in investing is less; hence it is important to invest your retirement funds wisely and carefully. The top priority should be to ensure a regular source of income. It is also essential to have some investments in liquid assets to meet any unexpected emergency.

Park some part of your retirement funds in the Senior Citizen Savings Scheme (SCSS) available in banks and post offices where you can earn higher interest rate. One can invest up to R15 lakh under this scheme. In case your spouse is also above 60, then you can invest up to R30 lakh in aggregate. The investment is exempt from tax under Section 80C but the interest payment is taxable. It has a lock-in period of five years that can be further renewed for another three years. In case of an emergency, there is a provision for premature withdrawal by paying a fine of 1-1.5% on the invested amount.

Post office instruments

The post office offers a popular instrument known as post office monthly income scheme wherein one can invest up to R4.5 lakh in a single account and R9 lakh in a joint account. It comes with a maturity period of six years. One can withdraw prematurely with a one per cent penalty. Returns are taxable and it is a preferred option for those in the lower tax bracket.

Post office time deposits (POTDs), similar to bank fixed deposits, are another option. There is no cap on how much one can invest but the interest is payable annually. The investment duration ranges from one to five years. Interest income is subject to tax but tax is not deducted at source. As these instruments are backed by the government of India, these are risk-free and offer guaranteed returns.

Reverse mortgage

This is ideal for those who have many immovable properties but little liquid assets. Under this scheme, a retired person keeps a house as collateral with the bank. In return, the bank makes monthly payments according to the value of the house. The borrower can opt for monthly, quarterly, annual or lump sum payments. As it is a loan, the interest rate is either fixed or floating and the payments are not taxable. The maximum period for which the property can be mortgaged is 20 years, post which either the borrower or the legal heir (in case of death of the borrower) can either repay the loan or sell the house and settle the transaction. The excess amount generated in the process is passed on to the borrower or the heir.

Other instruments

One can also park 10-20% of retirement funds in market-related products, preferably in equity mutual funds. It is prudent to invest in large and multi-cap funds. Similar to post offices, mutual funds also offer income plans. The regular income comes from dividend payouts, which are tax-free for investors. But unlike post office plans, where returns are guaranteed, there is no such surety about dividends from mutual funds. These are paid either monthly, quarterly or annually and the dividend amount is not fixed.

Resting easy

  • You can park up to R15 lakh in Senior Citizen Savings Scheme
  • Check out post office monthly income schemes and term deposits for guarnateed returns
  • Reverse mortgage is ideal for those with many real estate properties but limited liquid cash
  • 10-20% of retirement funds can be put in equity mutual funds, especially monthly income plan schemes
  • Make some investments in liquid assets to meet any unexpected emergency
  1. K
    Oct 31, 2016 at 2:16 am
    No distinction has been made in the article between govt. sector and private sector retirees. Governments (Central and States, including government-run departments: Indian Railways) p on inflationary pay and pension hikes to their employees and pensioners, every decade, when a new Pay Commission is appointed. In 2016, the 7th Pay Commission has awarded them very generously around one lakh crore rupees hike annually (Center only), on this score. By contrast, retirees of the private sector have been meted out a raw deal or step-motherly treatment. For instance, interest rate on government-managed (Central) Senior Citizens’ Saving Scheme, 2004 (SCSS) has been drastically/steeply reduced from 9.30 per cent to 8.60 per cent per annum from first April, 2016. The interest rate has been reduced again to 8.50 per cent, with effect from 1st October, 2016. The aggregate reduction, in percentage terms, in the interest rate is 0.80 per cent per annum (9.30 per crent less 8.50 per cent), and in monetary terms, it is a huge amount of Rs. 12, 000, per depositor per annum (Rs. 15 lakhs * 0.80 per cent) on deposit of Rs. 15 lakhs (the maximum amount permitted to be deposited in SCSS). According to monetary economists, the reduction woud spur higher rate of investment and economic growth. The oldies are not convinced by this speculative ertion. They value every rupee of their constant income (adjusted to current rate of inflation). It may be recalled that, when SCSS was commenced in 2004, the interest rate on 5 year deposit with public sector banks (PSBs) had fallen to around 6 per cent per annum. Concerned with the plight of senior citizens, who were already reeling under the runaway inflation, the then finance minister, P. Chidambaram, had provided some succor to them, which should not be taken away, or nullified by the present NDA regime. Currently too the PSB’s interest rate on 5 year deposit is moving towards the southward direction.More importantly, old age is characterized by serious sickness, requiring hospitalization (even ICU treatment, often for umpteen days), etc., before the oldies attain the lotus feet. The enhanced deduction for tax purpose in respect of hospitalization insurance premium is, so to say, is an eye wash only. Equally importantly, many of them may have children, who would not have completed their higher education. The outgo on this account and marriage expense, especially of their daughters, is another heavy expenditure, which have to be taken into consideration.

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