Retirement planning assumes significant importance for many other reasons today. It was not so long ago that one could look forward to a pension in retirement, the reward for a lifetime of service to one employer and in most cases was the government. And in a happy retirement, you could count on a free or low cost health care. This is not the picture of retirement today. With declining standards of public healthcare and absence of any social security, the retirees today can be in for a big surprise. In short, the retirement-planning atmosphere is witnessing a dramatic shift, moving from a system of dependence to one of increased self-reliance.

Given the kind of changes in the organised and unorganised employment sector, it is impossible to tell what the future holds. And no matter what awaits us, it is very clear that time is running out fast, if you do not take charge of your financial destiny. There are few dedicated pension funds available today, which in their present form are not the best alternatives for long-term savings. Given the tax break, they are suited only for a conservative investor. The key reason why these funds are not ideal long-term savings because regulations do not permit these funds to have a significant exposure to equities - the best performing asset class over long-term though volatile over short time periods.

The ideal form of a pension fund will the be a provision of a pension plan in all equity, debt and balanced funds, the way we have the Section 54EA and EB options. This is coupled with a reasonable tax break for investment with a lock-in till an investor retires or attains a stipulated retirement age. Besides, there should be a stiff deterrent by way of penal tax for early exit. Following this model, overnight we will have a wide choice of flexible pension plans.

Currently available alternatives by way of dedicated pension funds are the Unit Trust of India's Retirement Benefit Plan (RBP) and Kothari Pioneer's Pension Plan besides Life Insurance Corporation's Jeevan Suraksha. Following is the key features of the two dedicated pension funds.

Tax rebates
At present, mutual fund pension scheme offers benefits under Section 88 of Income Tax Act. Subscription made out of income chargeable to tax by an individual in Pension Plan, up to an amount not exceeding - will qualify for deduction from income tax (20 per cent) upto a maximum subscription Rs 60,000. Besides, there are other benefits for mutual funds as well like capital gains tax and benefits Section 80L. In LIC, the investments under the policy are deductible from income subject to a maximum of 10,000 in any given financial year under Section 80CCC (1). UTI is also seeking exemptions under this section. Though tax breaks are important, planning for retirement should not be only because of these breaks.

Safety
These funds do not guarantee any return. However, given a balanced fund structure of these funds, these funds are relatively safe and less volatile than an all equity fund. The only safety lies in the disclosure and transparency of these funds. UTI and Kothari Pioneer's stated asset allocation is 60:40 in debt and equities respectively. Besides, Kothari Pioneer has indicated a 100 per cent exposure in debt for the first three years. UTI does not disclose its RBP portfolio. While LIC does not disclose its investment pattern.

Returns
While LIC offers assured returns it comes at the price of lower returns. LIC gives around 10 per cent if you go by a simple arithmetic but it also provides an insurance cover. UTI and Kothari Pioneer do not offer any assured returns though Kothari has promised to charge no management fee in the first year of its operation if the net asset value of the fund did not gain 14 per cent. Kothari Pioneer provides for an annual dividend under its dividend plan with a reinvestment option to provide benefits under Section 80L.

Liquidity
Though liquidity is secondary in a pension fund investment, it might be important in unforeseen circumstances. UTI offers premature encashment under special circumstances after charging a 10 per cent administrative charge from the repurchase amount calculated on NAV based price. Kothari Pioneer allows repurchase at NAV based price after three years from the date of investment.

LIC Jeevan Suraksha: One can contribute Rs 150, and draw a pension after 55 or a life-long monthly pension with an option to commute 25 per cent of the corpus. Next, where the annuity is fixed for 15 years. Besides, there is a family pension which gives 50 to 85 per cent of the target annuity as family pension. Death benefits proceed to the spouse or to the nominee.

UTI's RBP: Opened in 1994, the minimum contribution is Rs 10,000 in units, either in lumpsum or installments till 52 issue monthly income from 58 years onwards. Repurchase is allowed after 70.

Kothari Pioneer Pension Plan: Investments have to be a minimum of Rs 10,000 in lumpsum or in instalments of at least Rs 500 and options are either income or growth. After 58, three choices are available under the income plan: Regular income leaving the corpus intact, partial withdrawal and still receive income on holdings or full withdrawal. The growth plan offers complete withdrawal at 58.

Open Ended Funds: Though pension schemes offer tax incentives, another way of saving for retirement could be the systematic investment plans of open-end scheme. To compensate for tax breaks, this offers more flexibility and could help investors identify funds to suit his risk-return profile. For instance, while saving for pension, an investor in 25-30 age group could go in for a systematic investment plan of an open-end growth fund. As he approaches his retirement, he could shift to an open-end debt fund and ultimately on reaching retirement, go in for systematic withdrawal plans.

This could be a better strategy than investing in a pension schemes, whose asset allocation would remain unchanged despite the changing risk-return profile of the investor. Besides, investing this way offers instant liquidity when ever required (on a no-load basis in many cases) and benefits under 54EA and 54EB which are not available with pension schemes, come under Section 88.

Value Research