SELF-EMPLOYED
In
EPF’s absence, invest in NPS, PPF, and mutual fund SIPs
Instead of reinvesting all surpluses in
business, invest a part in accumulating a retirement corpus
The Covid-19 pandemic has made people more aware
of the need to save aggressively for retirement. Around 67 per cent of
respondents in PGIM India Mutual Fund Retirement Readiness Survey 2023 (which
covered 3,009 people in nine metro and six non-metro cities) said they have a
retirement strategy in place, compared to 49 per cent in 2020.
The self-employed, however, were found lagging
in their retirement planning and preparedness. Of the respondents who mentioned
they do not need a financial plan, 40 per cent reside in Tier-I cities, have an
income between Rs 50,000 and Rs 75,000, are aged between 51 and 60 years, and
are mostly self-employed.
Different mindsets
The self-employed differ from salaried
individuals in their attitude towards retirement planning.
Salaried individuals tend to worry more about
external events like economic slowdown, inflation, stability of job and income,
etc. The self-employed tend to be more impulsive in their spending habits.
These characteristics affect their retirement preparedness.
Diverse requirements
The self-employed have irregular incomes. Their
cash flows tend to fluctuate. This has an enormous impact on their ability to
save. A salaried person has more control over cash flows.
The self-employed also lack access to
employer-sponsored retirement plans. They do not have access to the mandatory
Employee’s Provident Fund (EPF) and hence need to save for retirement on their
own.
Underestimating lifespan, corpus needed
Many self-employed individuals follow a
do-it-yourself (DIY) plan and end up making a hash of it. They would be better
off contacting a financial advisor. Some underestimate their life expectancy
and the corpus required during retirement. The underestimation of how long
their retirement savings need to last results in many outliving their corpus.
Another mistake is not diversifying their
retirement portfolio. They often invest all their eggs in one basket.
Many begin to save for retirements vary late.
Many self-employed also do not have a fixed retirement age in mind and hence to
not have a synchronised financial plan for retirement and estate distribution.
Some
don’t establish an emergency fund. When a financial crisis strikes, they use up
their retirement corpus. The
self-employed are also prone to taking loans and hence retire with debts. They
then deplete their savings to repay their loans.
What you should do
Start early so that your savings get time to
compound. Maintain a Chinese wall between business and personal income.
Drawing a fixed salary from the business and
investing a part of it in retirement fund.
Self-employed professionals may be tempted to
reinvest the majority of their savings into their business when they see better
prospects. They should diversify away from their business by investing in
liquid assets like mutual funds.
The self-employed should invest in the National
Pension System (NPS), a government-backed, low-cost retirement avenue where
they can choose the mix of debt and equity that is right for them. At maturity,
a part of the corpus must be invested in annuities, so that they can receive a
life-long pension. Public Provident Fund (PPF) should also be considered.
Systematic investment plans of mutual funds
should be harnessed during the wealth accumulation stage. The tax efficiency
and flexibility of a Systematic Withdrawal Plan (SWP) remains unmatched in the
withdrawal phase.
Buy Keyman insurance to ensure the business is
not impacted by a sudden mishap. Business persons should also consider Married
Women’s Protection (MWP) Insurance to protect their families from
creditors.
OPTIONS IN PPF ON COMPLETION OF 15 YEARS
I. CLOSE ACCOUNT
§ Close the account, withdraw accumulated corpus tax- free
II. EXTEND BY FIVE YEARS WITHOUT CONTRIBUTION
(DEFAULT
OPTION)
§ If the investor does not express explicit consent to withdraw, or continue with contribution within one year of maturity, the account gets automatically extended without-contribution
§ Once extended using this option, one cannot ever go back to With-contribution mode
§ Corpus continues to earn interest
§ One withdrawal per financial year is allowed. Can withdraw even the full amount
III. EXTEND BY FICE YEARS WITH CONTRIBUTION
§ Need to specify within one year of maturity or the end of the five-year extension period by submitting Form H, otherwise default option applies
§ Requires fresh contribution each year, minimum annual contribution is Rs 500
§ One withdrawal per financial year. Withdrawal capped at 60% of the account balance at the start of the extension period
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