Cash Flow Management After Retirement

Cash Flow Management After Retirement

Retirement is a welcome relief for some while it is an inconvenience for others. While some find retirement to be a time of indulgence, others fear the lack of income. Where do you stand? Do you consider your retirement to be a boon or a curse?

Retirement can become a boon if you plan for it in advance. In a study conducted by AEGON, called the Retirement Readiness Index, India, thankfully, had the highest score showing that Indians are very well prepared for retirement. Here are the findings of the index[i]:

Retirement Readiness Index

Are you prepared?

Retirement brings with it, a lack of regular income and so you should plan ahead for securing your finances post-retirement. Your financial plan should ensure a steady cash flow after retirement. Do you know about the investment options which help in this cash flow management? No? Let’s find out, shall we –

Life Insurance Pension Plans

Pension plans offered by life insurance companies are meant solely for retirement planning. These plans pay annuities for as long as you are alive. You can choose from two plan variants – Deferred Annuity Plans and Immediate Annuity Plans. Under deferred annuity plans, you can build up a retirement corpus by paying regular premiums. Thereafter, annuity payouts are made from the age you want and continue till your lifetime. Immediate annuity plans, on the contrary, pay annuity payouts immediately after you have paid a lump sum corpus. So, if you are already retired and have a corpus, you can invest it in immediate annuity plans for regular annuity payouts. What’s more, you can also cover your spouse to receive annuity payouts in case of your earlier death.

Pension Plans offered by Life Insurance companies

Tax treatment :- The investments you make towards life insurance pension plans are tax-free under Section 80CCC up to a limit of Rs.1.5 lakhs per year. In case of benefits, for deferred annuity plans, you have the option of commuting 1/3rd of the accumulated corpus. This commuted portion is tax-free. However, the annuity payouts you receive would be taxable in your hands at your income tax slab rate.

Senior Citizen Savings Scheme (SCSS)

SCSS is also ideal for senior citizens who are looking for regular incomes from their investments. If you are above 60 years of age you can invest in this scheme. The minimum investment required is Rs.1000 and the maximum is limited to Rs.15 lakhs. The interest rate is currently 8.30% per annum which is reviewed every quarter. This interest is paid every quarter thus ensuring that you get quarterly payouts. The term of the scheme is 5 years which can be further extended by 3 years.

Savings Scheme for Senior Citizen

Tax treatment :- The investments you make are exempted from tax under Section 80C up to a maximum of Rs.1.5 lakhs. The interest earned, however, is taxable. TDS is deducted from your interest income if such income is above Rs.10, 000.

Post Office Monthly Income Schemes

As the name suggests, these schemes promise a monthly income. You can invest in this scheme at any age. The maximum investment allowed is Rs.4.5 lakhs. The annual interest rate currently is 7.50% per annum. This interest is calculated every month and is paid monthly. Thus, like SCSS, if you have a retirement corpus, you can invest it in post office monthly income schemes and generate monthly returns.

Invest it in Post Office Monthly Income Schemes and get monthly returns

Tax treatment :– Both the investment made and the interest earned do not qualify for tax exemptions. Both are taxable.

Monthly Income Plans Offered by Mutual Funds

If you favor mutual funds and are seeking regular incomes, monthly income plans can be your best bet. These plans are, usually, debt mutual funds where equity exposure is about 15% to 25% of the entire portfolio. Thus, these plans are less risky and returns are better. These plans pay dividends (if dividend option is selected) at regular intervals which can be monthly, quarterly, half-yearly or annually. The returns are non-guaranteed and range from 10% to 12% depending on the performance of the market.

Tax treatment :– The investments made are taxable. Dividends earned are not taxed in your hands. If you redeem the fund before 3 years, it is called a short term capital gain and is taxed in your hands. If on the other hand, you redeem after 3 years, you can get the benefit of indexation. The tax rate, then, would be 20% along with indexation benefit.

Here is a comparative analysis of these instruments –

Particulars  Life Insurance Pension Plans Senior Citizen Savings Scheme (SCSS) Post Office Monthly Income Schemes Mutual Funds

Monthly Income Plan

Eligibility Anytime after 18yrs of age 60 years and above Indian residents aged 10 years and above Any time after 18 years of age
Time to invest Deferred annuity plans should be bought pre-retirement to accumulate a corpus. Immediate annuity plans can be bought post-retirement with the accumulated corpus. Start after retirement Better to start post-retirement to generate regular monthly returns Start before retirement to generate better returns
Max amount No maximum limit Rs.15 lakhs Rs.4.5 lakhs No maximum limit
Min amount Depends on the policy selected Rs.1000 Rs.1500 Rs.500 (through SIP)
Tax benefits Investments are tax-free under Section 80CCC. Commuted pension is tax-free. Annuity payouts are taxable Investment is tax-free up to Rs.1.5 lakhs. Interest earned is taxable. Investment and interest are both taxable. Investments are taxable. Interest is taxed at income tax slab rate if redeemed before 3 years. After 3 years the interest is taxed @ 20% with indexation benefit

All these options provide you ways to manage your cash flow after you retire. Though pension plans are good, the annuity payouts are taxable. If you are 40 years and above you can choose Fixed Income plans offered by Life insurance companies. These plans pay tax-free benefit over 10-15 years. Mutual funds are a much-preferred investment instrument as they provide very good returns. You should have a healthy diversified portfolio comprising of balanced funds, large-cap funds, debt funds and monthly income plans. You can choose SWP plans to get regular income.  So, take your pick from these instruments and relax. You wouldn’t have to worry about the lack of regular income. The incomes would come to you themselves.