How to plan finances in the post-retirement phase of life

2 MinsJune 09, 2023

When you have a regular income in the form of salary or business income, everything seems to be going well. But after retiring or taking a permanent break from work when the flow of regular income stops, many people get cautious with spending.

How to plan finances in the post-retirement phase of life

Even though people plan their savings and investments, not everyone is confident with the corpus they build and therefore are particular about spends.

But what if you are presented with an option where you invest regularly till you retire and subsequently the investment takes care of you in the post retirement phase in the form of regular income?

NPS is the answer.

You may wonder what NPS is. It stands for National Pension Scheme. It is an investment-cum-pension scheme launched by the Indian government for its citizens. It is a simple and easy-to-understand retirement saving product. It gives you an opportunity to build a sizeable retirement corpus from which you will get a regular income in the form of pension in your golden years.

How does NPS function?

It pretty much functions like a mutual fund. Suppose you decide to open an NPS account. The first thing to do is choose a pension fund manager. Few companies have a mandate to offer this product and manage the investments of customers. Some of the PFMs (pension fund managers) are SBI Pension Fund, LIC Pension Fund, UTI Retirement Solutions, HDFC Pension Management, and Axis Pension Fund Management among others. 

You don't require a large chunk of money to start investing in NPS. You can open an NPS account with just Rs 500. Subsequently, you need to contribute a minimum of Rs 1000 every year. There is no maximum limit. The PFM invests your money in different asset classes like equities, corporate bonds, government securities, and alternative assets. 

While equity provides the potential for wealth creation in the long term, corporate debt, and government securities provide stability to your investments. Exposure to alternative assets like Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), venture capital funds, etc. provides diversification and an extra bit of return potential to your overall portfolio. 

Investment options as per your choice

NPS provides you with two investment options – Active and Auto choice. 

Active choice: It is ideally meant for 'do-it-yourself' investors. It gives you the flexibility to create a customised asset allocation among four asset classes as per your risk appetite. However, the maximum investment limit in an equity fund is up to 75%, and in an alternative assets fund is up to 5%. In corporate debt and government securities funds, you can invest up to 100%.

Auto choice: In this case, the allocation between equity, corporate debt and government securities is automatically managed on a pre-defined formula based on your age. You need to choose between the three ready-made asset allocations – aggressive, moderate, and conservative. These allocations are based on the principle of life cycle investing which states that young investors should begin having a higher allocation toward equity and reduce the same as they age and reach retirement. Simply put, you don’t have to make asset allocation decisions in auto choice.

When it comes to withdrawing the corpus at the age of retirement i.e. 60 years, there are certain conditions to keep in mind: 

The amount you can withdraw: You can withdraw a maximum of 60% of the accumulated corpus, and the balance amount is used to purchase an annuity scheme from a life insurance company. An annuity provides you with a regular pension for the rest of your life.  

Premature withdrawal: There is an option of an early exit and premature withdrawal as well. You can exit before maturity provided you have stayed in the scheme for a minimum period of five years. In that case, you can withdraw up to 20% of the accumulated corpus, and the balance of 80% will be used in purchasing annuities.

Partial withdrawal: NPS also allows you to withdraw partially for reasons such as children's higher education and marriage, purchase/reconstruction of a residential house, and to meet medical emergencies among others. You can partially withdraw up to 25% of your contribution a maximum of three times during the tenure. However, partial withdrawals are allowed only after completing three years in the scheme.

Tax benefits

Apart from building a retirement corpus, NPS also helps you in saving tax. Investments of up to Rs 1.5 lakh can be claimed for tax deduction under section 80 CCE of the Income Tax Act. Further icing on the cake is you get an additional deduction of Rs 50,000 under section 80CCD (1B). On maturity, the accumulated corpus that is withdrawn and the balance which is used for purchasing annuities are also tax-free. However, the subsequent income received in the form of a regular pension is taxable.


Also Read: [PPF Vs NPS - Key Differences Between The Two Investment Options]

To conclude, NPS can be a one-stop solution for all your retirement planning needs. It is an effective tool to build your retirement kitty so that you don’t need to worry when you hang up your boots and enjoy your golden years to the fullest. You can quickly invest in NPS with a few clicks through Axis Bank's internet banking and mobile banking platform.

Start your retirement planning journey by investing in NPS now!

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply