Statutory savings not enough for retirement corpus
While the government’s mandatory pension provisions are improving, you need to save a lot more regularly to be able to retire in comfort
The Melbourne Mercer Global Pension Index (MMGPI), published recently, has both good and bad news for India. India has shown the biggest improvement in its global pension ranking, with the index improving from 40.3 in 2015 to 43.4 in 2016. But, it still ranks 25th among the 27 countries the index covers. India belongs to the class of countries whose pension system “has some desirable features but also has major weaknesses and/or omissions that need to be addressed”.
Among the positives MMGPI cites are the tax incentives for the National Pension Syatem (NPS), introduction of the Universal Account Number (UAN) for Employees’ Provident Fund (EPF), and increasing of the pension age from 58 years to 60 years under the statutory pension plan of the Employees’ Pension Scheme (EPS), which offers a regular stream of income on retirement.
Improvements made
Increasing awareness about NPS, and the additional tax the benefit of ~50,000 introduced for it, have helped to a great extent. “However, this extra benefit given by the government has resulted in subscribers restricting their contribution to only that amount, although they can contribute more and earn better returns from NPS,” says Anil Chopra, group chief executive officer, Bajaj Capital.
Another positive change that the age up to which you can contribute to NPS has been increased from 60 years to 70. “Earlier, even if a subscriber continued to work beyond 60 years, his NPS contribution would stop at 60 and his pension payouts would start. Now, you can contribute for more” says Chopra.
Recently, the Pension Fund Regulatory and Development Authority (PFRDA) allowed a new lifecycle fund under NPS. Under this fund, subscribers can invest up to 75 per cent in equities, till the age of 35 years. Earlier, investment in equities was restricted to 50 per cent. “The new lifecycle fund will improve the penetration of NPS, as those who are willing to take more exposure to equities now have a choice. This is useful, especially given that we are now in a low interestrate regime,” says Sumit Shukla, CEO, HDFC Pension Fund. NPS is able to provide four-five percentage points higher returns than EPF due to its equity exposure.
The shortcomings
In India, there is no statutory saving other than EPF and gratuity, where somebody can preserve their wealth for accumulation and ensure a regular stream of income after-retirement. “That is why the government’s proposal to stop withdrawal of EPF was actually a good move,” says Anil Lobo, India business leader-retirement, Mercer. However, this proposal was withdrawn due to the public raising a hue and cry. Hence, don’t withdraw your EPF even if you change or leave your job.
An underdeveloped annuity market is another negative. A part of the final corpus accumulated in NPS has to be compulsorily annuitised. But, annuity investments are largely in fixed income and do not offer good returns. Hence, subscribers don’t find these attractive. “If annuity providers are able to generate better returns, more people would be encouraged to invest in annuities,” says Lobo.
Sanket Kawatkar, principal and consulting actuary, Milliman India, says that annuities should have the right structure to make them attractive to investors. Today the entire annuity gets taxed. That is the capital invested also gets taxed.
Only a limited number of companies in India have adopted NPS. Encouraging more to offer the corporate model of NPS will also help. Employees will then be able to contribute ~50,000 or more, over and above the Section 80C tax deduction limit of ~1.5 lakh, which includes EPF. “Having corporatesponsored NPS will allow subscribers to contribute an additional 10 per cent more towards their retirement corpus, over and above the 15 per cent under EPF. The aim should be to have 70-80 per cent of the last drawn salary as post-retirement income,” says Lobo .
The 12 per cent contribution employees make today to EPF may also not suffice to ensure an adequate retirement corpus. Chopra suggests increasing the EPF contribution from the current 12 per cent to 15-16 per cent.
The five per cent incremental exposure to equities will boost its returns but only marginally. “Ideally EPF exposure to equities should be increased to 20 per cent, to generate better returns,” suggests Chopra.
What should you do
To ensure an adequate corpus at retirement, individuals should create their own retirement portfolio in which they should save primarily through diversified equity funds. Ideally, contribution towards retirement corpus should be 18-20 per cent of your take-home pay.
Self-employed individuals who don’t have the option of EPF, should invest in Public Provident Fund (PPF). “While PPF is a good tool to accumulate wealth, inflation may eat into the returns which are fixed. That is why having exposure to equity funds from the time you start working is essential,” adds Chopra.