Thursday, December 15, 2016

How to Plan Your Annuity to get Highest Regular Income

income plan for future
Retirement planning to ensure financial security and stability is crucial. Often, it is overlooked; however, if a person wants to sustain his or her present lifestyle, planning ahead is very important.

There are several financial instruments that are beneficial in generating regular income during the post-retirement years. To maximize the benefits of these products, it is vital to opt for goal-based investments.

Individuals must create an investment portfolio that appropriately suits their risk profile while meeting their financial objectives. Several Indians choose bank fixed deposits (FDs) to generate regular income. However, considering the returns after adjusting for inflation is important to determine actual earnings.

Here is how you may get regular income after retirement

Listing expenses

The first step for planning regular income after retirement is to list down the estimated expenses. These may include medical costs, children education, and any outstanding debt obligations. Individuals must also include monthly expenditures, such as groceries, utility bills, and other related costs. Based on this estimate, they may take help of an online pension calculator to determine the amount they would need to meet all these costs. Dividing the expenses by duration is beneficial in choosing the right financial product.

Income generating products

A large number of individuals consider investing in Public Provident Fund (PPF) and Employee Provident Fund (EPF) to plan retirement income. This is because these are the most easily understood pension plans and offer guaranteed returns on the investments. In addition, both PPF and EPF offer tax deductions under section 80C of the Income Tax Act. Moreover, these plans are under the EEE (Exempt-Exempt-Exempt) category, which means the investment capital, interest, and maturity benefits are all tax-free.

Other fourinvestment options are as follows

1. Post office monthly income schemes (POMIS)

These schemes have a maturity period of 5 years and interest is payable each month. The Ministry of Finance determines the interest every quarter; the current rate is 7.8% per annum. Although POMIS is simple to understand, it does not offer tax benefits. In addition, the interest earnings are taxable, which reduces the real returns.

2. Tax-free bonds

Individuals may purchase these bonds that have a maturity of up to 20 years. These are issued by public sector undertakings (PSUs) reducing the possible default risk. In addition, the interest earnings are not taxable. However, there are limited issues of such bonds and liquidity is not high, which may reduce the earnings in case of emergency exits.

3. Annuity plans

Unlike pension plans, annuities are acquired by investing a lump sum amount with an insurance company. The insurer offers a regular income to the investors during their lifetime. A major advantage of these plans is that the insurer assumes the risks and the investors are assured of a regular income for their entire lives. However, the potential returns on annuities may be lower.

4. National Pension System

National Pension System (NPS) is a defined pension plan. There is an increase in the number of its subscribers because of the favourable NPS tax benefits. The NPS allows individuals to accumulate a corpus through periodic investments. On maturity, the subscribers may withdraw up to 60% of the accumulated amount as a lump sum and convert the balance to an annuity plan offered by an insurance provider.

Investors may choose among the seven empanelled insurance companies. They also have the choice of opting for different annuity plans, such as

• Uniform annuity during life
• Annuity payable for specific period and during the lifetime of the annuitant
• Lifetime annuity and payable to spouse on demise of the annuitant (this is the default option)
• Increasing annuity at 3% simple rate

When an individual opens the NPS account, he or she receives a unique Permanent Retirement Account Number (PRAN). The PRAN status may be checked with the regulator or with the bank where the NPS account is availed.

Individuals may choose between different products to achieve financial independence and security during their retirement years. Seeking expert advice should be considered for maximizing the benefits.

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