Supplement your Provident Plans

Yogi — Mon, 23 Mar 2009 07:19:00 GMT

This could happen to anyone. Suppose you switch jobs, from a smaller organisation to a much larger company, with a huge jump in salary. The hike has you ecstatic till pay day. For, that's the time you find a huge chunk of your 'hefty' salary missing. It has gone as tax and into the Provident Fund (PF). While almost everyone has reconciled to living with taxes, it's not the same for PF. Why should the money go to such a fund when your retirement is years away and there is plenty of time to plan your finances? Don't you deserve to have a say in the contribution you make every month to the PF?

But then, say your elders and betters, the PF ensures that you make regular savings from your salary. This money accumulates over the years and comes to you as a lump sum when you retire as good as a small pension for life.

Assume you're 30 years old and plan to retire at 60. Your basic salary is Rs 15,000 a month and you expect it to grow at 10% every year. With an EPF contribution of 12% per month (or more if you wish to) and a fixed 12% contribution by the employer, your total accumulation before retirement will be Rs 1.35 crore. Even with a 5% increment in basic salary every year, your corpus will grow to Rs 61.8 lakh in 30 years. With the returns guaranteed by the government, the EPF is by far the safest retirement planning instrument for the working class.

Now, add pension to this. Of the 12% contribution that the employer makes, 8.33% is diverted to the Employees' Pension Scheme (EPS), which offers a defined benefit at the age of 58 years. This contribution is capped at Rs 6,500 per year or Rs 541 a month. The Rs 541 invested every month in an instrument earning 8.5% will total Rs 3,39,206 after 20 years and Rs 8,93,032 after 30 years. This money is invested in an annuity to give a monthly pension after you retire.

Apart from all this, you can withdraw from this corpus after a specified period. Financial planners, of course, abhor the thought of dipping into retirement funds, but the fact is that sometimes the present is more important than the future. For instance, you might want to pay for a medical treatment that allows you to get back to work, rather than think of retirement.

However, there are certain restrictions with every kind of withdrawal. To take out money for housing, for instance, you need to be a member of the Employees' Provident Fund Organisation (EPFO) for at least five years, and the maximum amount you can withdraw is the basic salary plus dearness allowance for 36 months, or the cost of construction, whichever is lower.

So shouldn't we just stick to the PF for our retirement planning? No, because the money you get from this fund may not be enough for a comfortable retired life. You will have to beef it up with other investments. The PF helps you give a start and shows just how far you are from the mark.

Then, there's the problem of fund management. Till last year, the management of the EPF was guided more by political whim than by performance. But in 2008, the EPFO chose three new fund managers ICICI Prudential AMC, HSBC AMC and Reliance Capital AMC to manage the EPF corpus. While SBI will continue to be a fund manager, the new managers will take care of fresh funds that come into the EPF.
Service is another area that the EPFO has been known to ignore. This has prompted several companies to create their own PF schemes under an exempt trust. These exempt schemes offer better fund management at a lower cost.

Says Sushil Kumar Jain, chairman, Pioneer Group of Companies and managing partner Sushil Jeetpuria & amp; Co., a PF management company: The cost of administering an exempted trust is definitely much lower than being a part of the EPFO. This is incentive enough to move out as you match the returns or even earn more.

Cost aside, exempt trusts also offer better returns. Says Amit Gopal, Vice-President, India Life, a company that advises on Provident Fund: Prior to 2000, we earned more than what the EPF paid as its declared rate. Considering that we have to follow the same investment pattern as the EPFO, it indicates that there is scope to earn more than what is paid by the EPF.

This article is sourced from Money Today for InvestmentYogi.

Investing It! : salary, retirement, tax

Supplement your Provident Plans