Investors have various options for saving for retirement, including government pension plans, life insurance policies, and so on. Aside from traditional ways, mutual funds have begun to address the importance of retirement surplus.
A pension or a retirement mutual fund ensures that investors plan their retirement in such a way that their needs are met when they stop working professionally.
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Retirement funds, often known as pension funds, are investment choices that enable people to save a portion of their income for retirement. After retirement, these funds provide a consistent stream of funding; a retiree receives an annuity on their investment until death.
Pension funds invest on behalf of the investor, and the revenue gained from that investment is contributed as interest on the pool of funds. These provide a fixed benefit because they are not affected by asset returns or market movements.
Retirement mutual fund plans usually invest in low-risk investment options, like government securities, to ensure steady returns. Pension funds usually offer up to 11% interest depending on the policy and investments, making them better suited for retirement planning than any of the alternatives.
The primary characteristics of this fund are:
Pension plans/mutual fund retirement plans are less risky than others, making them an attractive retirement investment source. To provide consistent returns, these mutual fund programs typically invest in low-risk products such as government bonds and securities.
Withdrawal of investments from retirement savings before the age of 58 to 60 is discouraged. Investors have the option of withdrawing a large payment or receiving monthly annuity income.
Retirement mutual funds typically have a five-year lock-in period, whereas ELSS funds have a three-year lock-in period. However, because of the power of compounding, a longer lock-in period may be advantageous. When an investment is held over an extended period of time, it is usually unaffected by short-term market swings.
Mutual funds have begun to provide hybrid pension schemes. These hybrid plans invest in both the debt and equity markets. In these plans, equity exposure is often kept modest, ranging from 40-50%.
To generate a consistent income, these funds are mostly invested in low-risk investments such as government securities. They do, however, invest in both equities and debt instruments to ensure that the investment increases. Retirement mutual funds typically have a 5-year lock-in term or until retirement, whichever comes first.
The primary goal of such a fund is to provide a stable income after retirement. Furthermore, a retirement mutual fund can assist in the accumulation of a retirement corpus while taking into account rising inflation. Investors can invest in these funds via lump sum or SIP.
Investors can choose to withdraw their investment in a lump amount or through a Systematic Withdrawal Plan (SWP) to ensure consistent income and liquidity after retirement.
You can invest in a retirement fund directly via AMC or through trustworthy apps such as Groww.
There are several advantages of investing in a pension fund. These include -
Any contribution made towards retirement mutual funds is tax exempted up to a maximum amount of Rs. 1.5 Lakh (under Section 80C). These contributions can include both buying a new pension plan and renewing any existing fund to extend its services. However, the withdrawals are tax deductible. As the money is distributed as an annuity, it will draw tax depending on the existing rates.
Periodical payment of pensions is fully taxable, similar to policies levied on an individual's salary. However, if an individual opts for disbursement of the total amount post-retirement, the taxation policy may change. Government employees (including individuals employed in the armed forces) will be exempted from all taxes during disbursal.
Non-government employees may enjoy only partial tax exemptions to a certain amount. If gratuity is included with a pension, one-third of the total amount is exempted. Otherwise, only half of the total fund is tax exempted.
Pension disbursed as a monthly annuity by any family member is taxed as income generated from other sources. However, it is tax-exempted to a certain limit; up to Rs. 15,000, or one-third of the monthly annuity, whichever is less, is exempted from taxes. If an individual opts for disbursal of the total retirement fund, it is exempted from all taxes.
Q1. What is retirement fund meaning?
A retirement fund, or pension fund, is a long-term investing account that allows you to save for retirement period. You can save a portion of your present income for the future and benefit from certain tax breaks.
Q2. Do retirement funds have a lock-in period?
Typically, they have a lock-on period of five years or more.
Q3. Are retirement funds safe?
Just like cash held at banks, money invested in retirement funds is secured, except they carry certain market risks.
Q4. Who should invest in retirement mutual funds?
Retirement funds are appropriate for investors who desire to save for their golden years of retirement. Investors in their early twenties can also invest in these funds; thus, there is no minimum age limit for doing so.
Q5. Are retirement funds risky?
Retirement funds are comparatively less risky than other types of investing. They frequently invest in low-risk assets such as government bonds and securities.
Disclaimer - Mutual Fund investments are subject to market risks; read all scheme-related documents carefully.
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