Build Your Own PENSION PLAN

An investor can build his own pension plan with a mix of different options. Here's how you can go about it Change a leaky faucet, fix an electricity point, tighten a loose hinge—people do many things around the house to save money. Add one more to your do-it-yourself list this year. Make your own pension plan and save considerably more than the money you pay a plumber or an electrician.      The pension plan market has all but dried up after the Irda's diktat that insurers must give guaranteed returns on annuities. Most insurers have stopped selling pension plans. On the other hand, distributors don't want to push the low-cost New Pension Scheme (NPS) despite an upward revision in their commission.      Don't let your retirement planning suffer due to the regulatory problems and the distribution logjam. Take control of your retirement planning by structuring and managing your own pension plan. A little bit of research and prudent investment choices can help you save big on the commission and other charges payable on a pension product from aninsurance company.      Besides, it will be more transparent, and as the fund manager of your pension portfolio, you will have complete control over the investments. You can change the asset allocation as per your risk appetite and make changes you feel are necessary to optimise returns.      PV Subramanyam, financial trainer at Iris, is a long-time believer of the do-it-yourself approach to retirement planning. "The withdrawal of pension products by insurers is perhaps the best thing that could have happened to investors," he laughs. Subramanyam suggests that young investors should put their money in diversified large-cap equity funds and not be too concerned about short-term volatility. "In 20-25 years they will earn a handsome return," he says.      However, not everybody can manage his investments over an extended period. You need to have some knowledge of investment options, understand concepts like portfolio rebalancing and conduct basic research yourself. If you have the skills, go ahead and build your retirement plan. Here are a few steps that can help you build a successful pension plan.  Automate savings  Discipline is the key to long-term savings. To ensure this, put your savings plan on an auto mode by setting up ECS mandates for your SIPs in mutual funds. Keep the SIP payment date as close as possible to the day you get your salary so that there is no chance of blowing up the money on discretionary items. This way you won't have to depend on your will power to invest. Your bank will do it even if you are feeling jittery about investing in an overheated market. Smart tip: Opt for the Voluntary Provident Fund deduction in addition to your PF. VPF contributions enjoy the Sec 80C tax benefits and withdrawals are tax-free.  Diversify investments  Your pension plan is a long-term commitment. It will see many ups and downs and market cycles. Don't concentrate the investments in one asset class. It is best to diversify across equity and debt so that one black swan event doesn't wipe out gains of several years. Even within equities, large cap or multi-cap diversified mutual funds are your best bets. "Stay away from thematic schemes, sectoral funds and exotic products when you are saving for retirement. A simple index fund or a diversified multi-cap equity fund will work better," says Dhirendra Kumar, CEO of Value Research. In debt too, don't concentrate the investments in one option or maturity. Have a mix of fixed deposits of different terms, debt funds and fixed maturity plans. Smart tip: Use the '100 minus your age' rule to know how much you should put in stocks.  Rebalance periodically  Rebalancing is profit booking by another name. If the equity component in your portfolio surges ahead and your desired asset allocation changes, it may be time to rebalance. This might seem counter-intuitive because you will be required to prune the asset class that is doing well. Believe us, restoring the original asset mix in your portfolio not only reduces the risk but also holds the key to long-term wealth creation. Experts say rebalancing should be done once in 12-18 months. If you do it more often, it amounts to timing the market and defeats the purpose.  Smart tip: Try copying the auto choice of the NPS in which the 50% equity exposure is reduced by 2% every year after the investor turns 35. It reduces the portfolio risk.  Watch the costs  When you have an investment horizon of 15-20 years, even a small difference in cost can balloon into a big amount. The funds of funds offered by some mutual fund houses have very high charges. The buyer effectively pays an expense ratio for two funds. In stark comparison, the 0.0009% fund management fee charged by the NPS is one of the lowest in the world. "Buy passive funds and investment options that have a low cost structure," advises Dhirendra Kumar.  Smart tip: Index funds and ETFs have lower expense ratios than actively managed equity funds.  Minimise tax outgo  Structure your investments to minimise the tax outgo. Choose options that can help you defer the tax, if not completely avoid it. Gains from equity funds are exempt from tax if you remain invested for more than a year. Avoid churning your funds because there is a tax implication every time you sell a fund. The PPF and VPF are good ways to accumulate a taxfree retirement corpus. Use debt funds instead of fixed deposits to defer the tax till withdrawal. Even then, the tax will be lower because of indexation benefits available on longterm capital gains. Don't opt for the dividend option of non-equity funds because the dividend distribution tax will erode your returns. "But this could change as the DTC proposes to tax debt fund dividends as per one's income slab and also dilute the indexation benefit for long-term gains," says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services.  Smart tip: Balanced funds enjoy the tax treatment of equity funds. Use them to avoid paying tax on the income from debt funds.  Devise withdrawal strategy  Last but certainly not the least, devise a withdrawal strategy for the corpus after you retire. Your income will comprise interest from bonds and fixed deposits, dividends from funds and stocks and maturity proceeds of bonds and FMPs. Start systematic withdrawal plans that draw down from your investments in mutual funds. Don't opt for the monthly dividend option of MIPs from mutual funds unless you are in the highest income tax bracket. Instead, opt for the cumulative option and redeem some units every month. Manage your withdrawals in a way that your tax liability does not shoot up in one particular year.      Deploy your retiral benefits in a mix of fixed income options but steer clear of complex pproducts. "You can buy an immediate annuity from an insurance company," says Pai. Smart tip: Set up a ladder of FDs so that there is some deposit maturing very year. Reinvest the proceeds for the longest term.