Small savings and retirement planning

SMALL SAVINGS

• Small Savings Schemes are savings products administered by the

Government of India or public sector financial institutions. They have
different rates, tax treatment and tenures.

• However, one common theme among all these small savings schemes is
government backing which ensures the safety of your investment. The rates
on these schemes are revised by Government.
 Types of Small Savings Schemes

• Post office Savings Bank Account (POSB)

• Post Office Recurring Deposit Account (PORD)
• Post Office Time Deposits (POTD)
• Post Office Monthly Income Scheme (POMIS)
• Public Provident Fund (PPF)
• National Savings Certificate (NSC)
• Kisan Vikas Patra (KVP)
• Senior Citizens Savings Scheme (SCSS)
Post office Savings Bank Account (POSB)

• 4.0% per annum on individual / joint accounts

• Minimum INR 500/- for opening
• Only one account can be opened by an individual as a single account
• Only one account can be opened in the name of minor/above 10 years of age (self)/person of unsound
mind
• In case of death of a Joint holder, the surviving holder will be the sole holder, if surviving holder already
has single account in his/her name, Joint account have to be closed
• Conversion of single to joint account or vice versa is not allowed
• Nomination is mandatory at the time of opening of account
 Post Office Recurring Deposit Account
(PORD)
• From 01.04.2020, interest rates --- 5.8 % per annum (quarterly compounded)
(i) Account can be opened by cash/cheque and in case of cheque the date of deposit shall be
date of clearance of cheque.

(ii) Minimum Amount for monthly deposit is Rs. 100 and above minimum in multiple of Rs.
10.

(iii) Subsequent deposit shall be made up to 15th day of month, if account is opened up to
15th of a calendar month.

(iv) Subsequent deposit shall be made up to last working day of month, if account is opened
between 16th day and last working day of a calendar month.
 Post Office Time Deposits (POTD)

• Minimum INR 1000/- and in multiple of 100. No maximum limit :-

(i) Account type for 1 year, 2 year, 3 year, 5 year.

(ii) Account can be opened with minimum of Rs. 1000 and in multiple of Rs. 100. No maximum limit
for investment.

(iii) Interest shall be payable annually, No additional interest shall be payable on the amount of
interest that has become due for payment but not withdrawn by the account holder.

(iv)The annual interest may be credited to the savings account of the account holder by submitting
application.

(v) The investment under 5 year TD qualifies for the benefit of section 80C of Income Tax Act, 1961.
 Post Office Time Deposits (POTD)
Period Rate

1yr.A/c 5.5%

2yr.A/c 5.5%

3yr.A/c 5.5%

5yr.A/c 6.7 %
Post Office Monthly Income Scheme (POMIS)

• From 01.04.2020, interest rate --- 6.6 % per annum payable monthly.

(i) Account can be opened with minimum of Rs. 1000 and in multiple of Rs. 100.

(ii) A maximum of Rs. 4.50 lakh can be deposited in a single account and 9 lakh in Joint account.

(iii) In a joint account, all the joint holders shall have equal share in investment.

(iv) Deposits/shares in all MIS accounts opened by an individual shall not exceed Rs. 4.50 lakh.

(iv) Limit for account opened on behalf of a minor as guardian shall be separate.
 National Savings Certificate (NSC)

• National Savings Certificates (NSC) -- 5 Years National Savings Certificate (VIII

Issue)
• From 01.04.2020, interest rate --- 6.8 % compounded annually but payable at
maturity. INR 1000/- grows to INR 1389.49 ​after 5 years

(i) Minimum Rs. 1000 and in multiple of Rs. 100 , no maximum limit.
(ii) Any number of accounts can be opened under the scheme.
(iii) Deposits qualify for deduction under section 80C of Income Tax Act.
 Kisan Vikas Patra (KVP)

• From 01.04.2020, interest rate --- 6.9 % compounded annually -- Amount

Invested doubles in 124 months (10 years & 4 months)
(i) Minimum Rs. 1000 and in multiple of Rs. 100 , no maximum limit.

(ii) Any number of accounts can be opened under the scheme.

 Public Provident Fund Account

15-year Public Provident Fund Account (PPF)

Interest payable, Rates, Periodicity etc. Minimum Amount for opening of account and
maximum balance that can be invested.

From 01.04.2020, interest rates are as follows: Minimum INR. 500/-

o 7.1 % per annum (compounded yearly). Maximum INR. 1, 50,000/- in a financial
year. Deposits can be made in lump-sum or in
instalments.
 Public Provident Fund Account

• Salient features including Tax Rebate:

• An individual can open account with INR 500/- and a deposit minimum of INR 500/- in a
financial year and maximum INR 1,50,000/- (including amount deposited in minor account
opened on behalf of guardian).

• Any account in which the account holder, having deposited five hundred rupees in the initial
year, fails to deposit the minimum amount in the following years, shall be treated as
discontinued and that account may be revived during its maturity period on payment of a fee
of fifty rupees along with arrears of minimum deposit of five hundred rupees for each year of
default
 Public Provident Fund Account

• Joint account cannot be opened and only one account can be opened by a citizen in
India
• Account can be opened by cash / Cheque and In case of Cheque, the date of realization
of Cheque in Govt. account shall be date of opening of account
• Nomination facility is available at the time of opening and also after opening of account
• Account can be transferred from one post office to another
• The subscriber can open another account in the name of minors but subject to
maximum investment limit by adding balance in all accounts
 Public Provident Fund Account

• Maturity period is 15 years but the same can be extended within one year of maturity for
further 5 years.
• Maturity value can be retained without extension and without further deposits also
• Premature closure can be allowed after 5 years from the end of the year in which the account
was opened subject to the following conditions.
• 1% interest will be deducted from the date of account opening
• In case of life-threatening disease of account holder, spouse or dependent children.
• In case of higher education of account holder or dependent children.
• In case of change of resident status of accountholder
• Deposits qualify for deduction from income under Sec. 80C of IT Act
 Public Provident Fund Account

• Interest is completely tax-free

• Online Deposit facility is available through Intra Operable Net banking/Mobile Banking.
• No attachment under court decree order
• The PPF account can be opened in all departmental post offices
• Loan can be taken after the expiry of one year from the end of the year in which the initial
subscription was made but before expiry of five years from the end of the year in which the
initial subscription was made
• Withdrawal can be taken after the expiry of five years from the end of the year in which the
account was opened.
Senior Citizens Savings Scheme Account
 Salient features including Tax Rebate

• An individual of the Age of 60 years or more may open the account.

• An individual of the age of 55 years or more but less than 60 years who has
retired on superannuation or under VRS can also open account subject to the
condition that the account is opened within one month of receipt of retirement
benefits and amount should not exceed the amount of retirement benefits
• A Retired personnel of Defence Services (excluding Civilian Defence employees)
shall be eligible to open an account under this Scheme on attaining the age of 50
years subject to the fulfilment of other specified conditions
 Salient features including Tax Rebate
• Maturity period is 5years
• A depositor may operate more than one account in individual capacity or jointly with
spouse (husband/wife)
• Account can be opened by cash for the amount below INR 1 lakh and for INR 1 Lakh and
above by Cheque only.
• Nomination facility is available at the time of opening and also after opening of account.
• Account can be transferred from one post office to another
• Any number of accounts can be opened in any post office subject to maximum
investment limit by adding balance in all accounts.
• Joint account can be opened with spouse only and first depositor in Joint account is the
investor.
 Salient features including Tax Rebate

• In case of SCSS accounts, quarterly interest shall be payable on 1st working day of April,
July, October and January. It will be applicable at all CBS Post Offices.
• Quarterly interest of SCSS accounts standing at CBS Post offices can be credited in any
savings account standing at any other CBS post offices.
• Premature closure is allowed,
• If closed before 1 year , no interest will be payable, if paid already will be recovered.
• After one year on deduction of an amount equal to 1.5% of the deposit to be deducted
• After 2 years 1% of the deposit to be deducted.
 Salient features including Tax Rebate

After maturity, the account can be extended for further three years within one year
of the maturity by giving application in prescribed format. In such cases, account
can be closed at any time after expiry of one year of extension without any
deduction.
TDS is deducted at source on interest if the interest amount is more than INR
50,000/- p.a.
Investment under this scheme qualifies for the benefit of Section 80C of the Income
Tax Act, 1961 from 1.4.2007.
RETIREMENT PLANNING
 Retirement Planning

• What is Retirement Planning?

• Retirement planning is the integral part of financial planning.

• It involves accumulation of enough funds by the time of retirement to enable him with regular flow
of income for the rest of his life so that he can live comfortably without compromising on his
standard of living having taken in consideration the effect of inflation.
 Retirement Planning

• We will have to consider many factors while making a retirement plan :

• Employer provide pension and other retirement benefits like Gratuity, PF etc

• Time horizon available to accumulate money

• Any reduction in standard of living.

• Emergency provision

• Health insurance required

• Any goals approaching after retirement like plans for tourism ,etc.

• Any goals of leaving an estate for next generation.

 Re t i re m e n t P l a n n i n g
Factors that impact the Retirement Planning
Every person has a need to plan for his own retirement because of the following reasons

Inflation

Regular
Medical
Standard of
Emergency
living

Changes in
lifestyle Family issues

Overall life
expectancy
 Retirement Planning- Start early
• If the time horizon is for accumulating money is long ,i.e. some body has started retirement
planning at an early stage than he will have to save smaller amount every month in order to
achieve his goal of funding for retirement.

• For example:

• Two persons require Rs 50,00,000 each at the time of their retirement at the age of 60.

• Person A starts saving at the age of 25 and will have to save Rs.778 every month for 35 years if the
average rate of return is assumed to be 12% in order to accumulate Rs 50 lakhs at the age of 60

• Person B starts saving at the age of 35 and will have to save Rs 2662 every month for 25 years if
the average rate of return is assumed to be 12% in order to accumulate Rs 50 lakhs at the age of
60.
PV of Future Cash Flow
 Retirement Corpus
• Retirement planning is a comprehensive process of determining how much money
you will need when you retire and also to help you identify the best way to save
for retirement given your financial situation.

• Retirement planning is the need of every individual whether he is salaried person ,

businessman or a professional.

• At age 65,the average man will live almost 20 yrs more, while a woman will live
another 22 yrs .We will probably spend 25%- 30% of our life in retirement ,
requiring reasonably good funds to support the retired life.
 Retirement Corpus
• Retirement is different things to different people. For those
• in their 20s, its a distant dream;

• in their 30s and 40s ,it is a minor concern ,

• in their 50 and beyond , it is a realty that must be dealt with.

• When planning for retirement , you will want to crunch some numbers just
to be sure you will have enough money to reach your retirement goals.
 Retirement Corpus

• A financial planner will help individual to calculate the amount required to save every month
from now on, to reach the goal of having a comfortable life after retirement without having to
make any sacrifices. He will be aware of the following before calculating the amount that must be
saved towards retirement planning.

• Let us take up an example to understand how a financial planner will help his client to make an
efficient retirement plan.
 Retirement Corpus

• Income per year XXXXXXX

• Expense per year XXXXX

• Age today XX yrs

• Retirement age XX yrs

• Expected return on investment up to retirement XX % p.a

• Expected return on investment after retirement XX %p.a

• Assumed average inflation rate XX % p.a

• Assumed life expectancy for both the partners XX and XX yrs

 Retirement Corpus

• Mr. Karan , who is a 30 yr old approached a financial planner for analysis of his retirement needs
and wishes to start saving now towards this goal. He will retire at age 55.

• Life expectancy is assumed to be 75 years. Present annual expense are Rs. 3,00,000 and he wishes
to maintain same standard of living after his retirement.

• The rate of return expected on investment is 12 % per annum and the average inflation rate is
assumed to be 5.5% p.a. throughout the phase. How much does he need to save every year in
order to maintain the same standard of living even after retirement?

• This question will be answered in three steps.

 Retirement Corpus

• Step 1:

• Is to calculate the amount of the annual expense at age 55.

• This will be done using the inflation rate as(I), as expense increase at the rate of inflation

• Expenses: -300000 =PV

• Inflation 5.5 = i

• Time to Retire 25 = n

• Compute FV = Rs.11,44,018
 Retirement Corpus

Step 2

• Is to calculate the amount of accumulated savings that Mr. Karan should have at the age of 55 to enable him to get an annual
payment of Rs.11,44,018 at the beginning of every year for 20 yrs , i.e. up to age 75.

• Future Value (FV) of expenses: 1144018 = Pmt

• No. of years: 20 = n

• Real Return (adj. for inflation): 6.16= i

• Compute PV: Rs 1,29,53,715

• (Rate here will be real rate of return, i.e. return adjusted for inflation=(1+i/1+e)-1x100

• I =rate of return on investment and e=inflation rate)because he will have to face inflation even after retirement.
 Retirement Corpus

• Step 3
• Is to calculate the amount of yearly savings that Mr. Karan should make for
25 years to enable him to get corpus of Rs 1,29,53,715 at the age of 55, if he
is able to invest his savings @10% per annum.

• 1,29,53,715 / 98.347 = 131714

 Retirement Products
Step 3
Product Remark
Is to compute the amount to be saved each month in order to accumulate the required amount of
Bank FDs Bank
Rs.1,37,50,953 to FDs are the goal
achieve mostofpopular investment
retirement vehicle of the retired individual. Most of the banks also offer better
planning.
interest rates for the retired
Present Value: individual.
Rs. 13750953 = FV
Expected Return: 12/12 = i
Senior citizen’s Number
Savingsof months:
It gives you an assured25rate of n
x 12= 7.4% per annum for five years, which can be extended by another three years. SCSS
scheme has been a favourite Rs.7,318.83
Compute Pmt: among financial
(7,310)planners for a long time and is almost a must-have for senior citizens
seeking regular income.

Mr Rohan has started investing money at age 30 and therefore he has to save Rs.7,319 per month
Post Office MonthlyhisThis
towards offers agoal.
retirement return of 8% per annum, payable monthly. However, you would get more in FDs and SCSS
Investment Scheme

Had he started planning 5 years earlier, then he would have had to save a smaller amount each month.
Therefore ,retirement planning is need of everyone and one should start planning for retirement from
Reverse mortgage For asset-rich-cash-poor senior citizens, the reverse mortgage product is an effective post-retirement investment
the time one starts work.
vehicle. Here the bank keeps your house as collateral and pays you the value of your house in equated monthly
instalments
 RETIREMENT PLANNING
• There are many factors related to retirement planning, and it is never too early to
begin. One can define own retirement goals and need to start a retirement savings
plan before considering actual retirement.

• Follow the following four simple steps to arrive at an ideal retirement plan:
• Step 1: Decide how much income you require to live comfortably in your post-
retirement years. Remember to take into account aspects like increased medical
costs, expenses and gifts for family.
• Step 2: Calculate the amount to be received in lump sum (terminal benefits) at the
time of retirement.
 RETIREMENT PLANNING

• Step 3: Select the right retirement plan that enables you to meet your post-
retirement requirements. Preferably, choose to invest in asset classes, which can
provide you with potentially higher returns in the long run.

• Step 4: Start investing very early so that you have time on your side and can enjoy
the power of compounding.
 RETIREMENT PLANNING
• How much retirement income will I need?
• An easy rule of thumb is that you’ll need to replace 70 to 90 percent of your pre-
retirement income.

• If you’re making Rs20,000 a month (before taxes), you might need Rs15,000 to Rs18000
a month in retirement income to enjoy the same standard of living you had before
retirement.
 RETIREMENT PLANNING
Action Points: How to Prepare for Retirement?

• It’s never too late to start. It’s only too late if you don’t start at all.
• Deposit everything you can into your retirement plans and personal savings.
• Reduce expenses and funnel the savings into your kitty.
• Aim for higher returns and tax savings. Don’t invest in anything you are not comfortable
with.
• Refine your goals. You may have to live a less expensive lifestyle in retirement.
• Sell assets that are not producing income or growth and invest in income-producing
assets.
 Various Retirement Solutions

Compulsory Program
• Employees’ Provident Fund
• Employees’ Pension Fund
• Civil Service Pension Scheme
• Government Provident Fund
 Various Retirement Solutions

Voluntary Program
• Public Provident Fund
• Group Superannuation Plans
• Personal Pensions Annuity products
• National Pension scheme
 Various Retirement Solutions

Social Assistance
• State level social assistance
• National Old Age Pension Scheme
• National Family Benefit Scheme (NBFS)
 Pricing

• Small Savings Schemes --- The role of Government

 Retirement Plans

• Cost of retirement system (C) = Assets (A) – Liabilities (L)

• C = [Investment returns + Contributions to the plan] (A) – [Benefits to be paid +

Administration expenses] (L)

As the cost components as mentioned above can not be known until the last benefit is
paid, these are assessed and statistically estimated by actuarial valuation.
 Assumptions for Actuarial Valuations

Assumptions Examples of Factors Considered

Economic assumptions: These assumptions relate • Annual investment returns
to the expected long-term financial experience of • Total inflation
the plan • Annual salary increases
• Post retirement health premium trend
Demographic assumptions: These assumptions • Morality rates
relate to the pension plans’ consumer population • Total turnover rate
and their changes over a period of time • Retirement rates
• Assumed retirement date if before 50 years of
age
Actuarial assumptions: These assumptions are • Spouse’s age
used, in addition to the economic and demographic • Contribution refund rate
assumptions, in actuarial analysis. • New entrants
• Dependent children
• Medical benefit valuation
 Advertising

Media Strategy
• Media Strategy for small savings --- print media, films, television,
distribution of leaflets, audio-visual material and radio.
• Media Strategy for retirement plans --- television, press, radio, internet,
direct marketing.
 Advertisement appeals for Retirement
Solutions

• Emotional appeal
• Fear-based appeal
• Zealous appeal
 Sales Promotion

• Sweepstake offers for small savings schemes --- Offering prizes through
lucky draws
• Special campaigns by Central and State governments
 Public Relations

• PR in small savings --- Publicity vans, Events

• PR in retirement solutions --- Conducting Seminars, issuing retirement
planning booklets, providing retirement calculators.
 Distribution

• Distribution of small savings schemes

• Personal selling through agents
• Indirect distribution --- Through Post offices, Branch network of nationalised
banks, Private bank branches
 Distribution

• Distribution of Retirement Products

• Direct Sales force
• Direct marketing --- through postal mail, telephone and e-mail
• Direct selling agents
• Bancassurance