Saving for retirement: Three things to remember

26 April 2005

At a time when we are moving from a scarcity to a surfeit of retirement funds, one must choose with care, says S Muralidharan, chief marketing officer of SBI Life Insurance.

Apart from hope, ambition and confidence, three less-spoken-about emotions that govern the feelings of any young professional contemplating his or her life ahead are fear, uncertainty and doubt; or, as someone coined the term, FUD. Fear about the future. Uncertainty about sustaining earnings. And doubts about whether the money they have saved will remain safe over the years and keep growing.

In the area of retirement planning, these three elements are very relevant. Financial self-reliance is an essential pre-requisite to enjoy one's old age. As the economic conditions in the country get more competitive and the social milieu becomes more fragile, everyone needs to ensure that their old age will be free of financial problems.

This is more easily said than done. Unlike in advanced countries, it is not compulsory in India for every individual to enroll for a retirement saving plan. The menu of safe and profitable avenues of saving for retirement is limited. Until very recently, the state has not offered any major incentives to those who want to save for retirement. The government offered a tax relief on retirement savings of just Rs10,000 per year and, to add insult to injury, subjected pension payments to tax at the same time.

All this is now hopefully set to change. The limits on pension savings have just been removed. Simultaneously, several life insurance companies have recently launched retirement saving plans. They offer to manage funds set apart for retirement during one's working life, and convert the accumulated saving into annuities or pension payments, anytime from the age of 55 onwards. Several firms focused on managing retirement savings are set to open shop. Their job will be only to manage the funds during the accumulation stage; they will not be involved with annuity payment commitments after one ceases working.

Therefore, if we are moving from a position of scarcity to a state of surfeit of retirement saving plans, how does one make the right choice?