After retirement, you should have access to steady income so that the life will be less stressful. Instead of taking the lump sum, you can prefer monthly payments to meet various kinds of expenses. If you are not an experienced investor, there will be a great loss of money. On the other hand, if you get access to lump sum fund, you should take full responsibility in investing the fund. If you have access to the lump sum, you are prone to spend the money. You should remember the old slogan of SBI, ‘Money with you flies. With us it multiplies’. Hence, if you are poor in the art of investing, you might burn your hands and fail to manage sufficient funds to manage stress-free golden years.
Advantages of taking lump sum
The Pension Plan will help you live a dignified life in golden years. You should manage sufficient funds as per your lifestyle and dreams. It is the time to fulfill your unfulfilled dreams in your life.
- Complete control on investment – If you are an experienced investor, you can allocate funds into various high-yielding financial instruments and you will reap best benefits. You will be complete control of the funds and you can make the most of your investment. The loss or gain made with the lump sum will be borne by the investor.
- Returns beat inflation – If you can manage the funds in a very efficient manner, you will get returns that can overcome the inflation. There will be a steady source of funds which will last throughout your life.
- Leave money to heirs – It is possible to leave money to legal heirs as well when the funds are managed in a very efficient manner.
In order to achieve your short-term and long-term goal, you should have the plan and it should be executed precisely. You can also take a professional advice to manage funds.
Disadvantages of taking lump sum
Loss of capital – If you are a novice or poor investment skills, you may lose your capital
Lack of discipline – If you have access to the lump sum, you might spend the money and fail to accumulate for golden years.
Advantages of monthly pension payments
- Steady source of income – There will be regular stream of money with the help of annuities.
- Free from investment risk – You will be free from reinvestment risk that arises with the ‘Senior Citizens’ Savings Scheme’ and bank fixed deposits.
- Protection from Inflation – By subscribing to a guaranteed annuity plan, there will be protection on interest rate reduction.
- Concealed from market volatility – The monthly payment is concealed from the market fluctuations.
Drawbacks of monthly pension payment
After buying the annuity plan, you will lose the liquidity potential. If you need access to emergency funds, the annuity funds cannot be withdrawn. Hence, you are advised to commit a small portion of the annuity into pension funds.
The annuity income is taxable
If you are in a higher tax bracket, there will be great loss through the monthly pension.
- You can manage income generation on a regular basis by implementing the following strategy:
- Investment in debt-based mutual funds (considered as fixed income investments)
- Tax-free bonds of duration (15 years to 20 years)
- To overcome the inflation and the depreciation of the investment, you should go for long-term equity investment as well.
Tips to make the most of your retirement funds
- You should reserve a portion of funds to meet emergency needs.
- By buying a comprehensive health insurance policy, you should be able to cover most of the health-related expenses. There are various riders which can be applied to get maximum benefit from the insurance policy.
- You should invest certain portion of the funds into long-term equity or mutual funds. There will be exemption up to Rs. 1 lakh earned in a financial year on Long Term Capital Gains (LTCG).
- Market-linked products will deliver highest returns. You should divide investment between guaranteed returns and risk-oriented products to make the most of your investment.
- By comparing various annuity plans offered by different insurance companies, you can choose the best plan that will take care of your financial needs in golden years.
- The terms of the annuity contract cannot be reversed. Hence, you should take the best decision to make the most of the pension funds.
- You should choose a policy from the reputed insurance company which offers good returns as well as best customer support.
The annuity market is growing in India and it will help you manage funds on monthly basis. However, you should distribute your funds into various financial instruments so that the risk will be balanced in a very efficient manner. You should not keep all your baskets in one egg. Diversification is the key to protect your capital and returns. Hence, you should make the best choice by allocating funds into various short-term and long-term funds as per your tax bracket.