It is often said that the only person who will take care of the older you someday is the young you today!

While there is no denying the sombre truth that resonates from these words, it is worth considering some of the accessible and tax efficient options available to us for building a secure retirement.


What is Superannuation?


There is no denying the need for planned regular income available to us once we retire from our regular salaried jobs. In India, a few decades back, employment in the public sector held a special sheen emanating from the ‘pension’ benefit available once retired.

This option was supported by what is best known as the ‘Defined Benefit Superannuation’ scheme, where some percentage of your income is put away during your earning years by your employer.

The collective amount of all employees is given to an Insurance company to manage efficiently under regulated guidelines. Under this, the benefits at retirement or pension are already known to an employee and are fixed.

Therefore, the risk of generating such defined benefits is purely dependant on an employer (usually based on a formula linked to salary, years of service).

This amount is then disbursed at the time of retirement for each employee through annuity pay-outs which is nothing but regular monthly instalments that are guaranteed.

However, Defined Benefit schemes are difficult to manage given the interest rate changes and the larger economic environment. These are now replaced by ‘Defined Contribution Superannuation’ schemes offered by companies.

Under these schemes, the company either makes a fixed contribution per month on behalf of the employee and the employee also contributes similarly or sometimes it is purely a voluntary option offered by companies for employees to partake in.

The fund is still managed by competent fund managers at an insurance company under regulated guidelines. Under this, the contribution is only known and fixed and the end benefits of retirement are not guaranteed.

In such type of benefits, the risk is with an employee as he doesn’t know how much return will be generated and how much he will get at retirement beyond capital.

However, the money accumulated over time along with interest is passed on as a lump sum at the time of retirement directly to the retiring employee to purchase an annuity. An annuity will give regular monthly instalments that are guaranteed.


How Does an Employee Get ‘Pension’ after Opting for Superannuation?


In India, the money received at the time of retirement from superannuation proceeds can be partly taken (up to 1/3rd of the total amount) as a tax-free amount and the remaining is to be used to purchase an annuity.

Annuity Plans give an individual periodic payment for life – whether monthly, quarterly, half yearly or yearly; and invariably plays the role of ‘pension’ post-retirement.

Annuity takes care of the risk of living too long, by ensuring regular pay-outs for as long as you live. No other instrument in the market works with a guaranteed payment without a fixed tenure.

It is unlikely to find a better option to protect you financially during your retirement years!

“The trouble with retirement is that you never get a day off” ~ Abe Lemons