Retirement Planning - Textbook

retirement planning is to produce enough assets and cash flow to support desired lifestyles and goal achievement. This brings us to retirement cash flow and withdrawals strategies. We will explore this area in the next chapter. Question Annuities have been used as part of retirement funding for many years. They are an investment option rather than a retirement plan type. Which of the following statements regarding life annuities is least likely correct? a In most cases, if you buy a life annuity for $100,000 at age 65 with an income of $500 per month, your family will get $10,000 back if you die at 80 years old after 180 payments. b If you buy a life annuity for $100,000 at age 65 with an income of $500 per month, you get your $100,000 back by age 82. If you live past 82, you will still receive $500 a month as long as you live. c With a life annuity there is no risk of outliving your income. d A life annuity provides guaranteed income payments for as long as you live Correct Answer A Explanation In most cases, your life annuity income payments stop when you die and no money goes to your estate or a named beneficiary unless there is a joint and survivor option, a guarantee option or a cash-back option. Distractor #1 b If you buy a life annuity for $100,000 at age 65 with an income of $500 per month, you get your $100,000 back by age 82. If you live past 82, you will still receive $500 a month as long as you live. Distractor #2 c With a life annuity there is no risk of outliving your income. Distractor #3 d A life annuity provides guaranteed income payments for as long as you live CFP Level 2: Module 1 – Retirement Planning - Global Page 95

Chapter-5 Retirement Cash Flow, Withdrawal Projections and Strategies Learning Outcomes Upon completion of this chapter, the student will be able to:  Analyze financial projections for a client’s retirement plan  Describe whether a client’s retirement objectives are realistic  Describe the impact of changes in assumptions on financial projections  Explain factors impacting retirement account distributions  Apply retirement distribution strategies Topics  Sources of cash flow in retirement  Portfolio distribution strategies  Retirement distribution rates  Sequence risk  Portfolio distribution options  Impact of taxes on retirement cash flow Introduction As the client enters retirement age, he stops working but financial advisor has to keep in mind that his regular income in the form of salary etc. has stopped. If money is lost because of financial mistake, there is no time to recover it. Younger clients can make a financial mistake and recover from it. They are still earning an income, so lost money can be replaced. It is always advisable to not make too many mistakes, of course, but the earned-income safety net allows the wage earner to be a little more aggressive – not so for retired clients. This is why advisors should monitor spending, goals and equity exposure and adjust as the client proceeds through retirement. The retirement goal is to accumulate enough assets to generate the desired level of sustainable cash flow in retirement with a reasonable cushion. Once retired, the goal is to working with sustainable withdrawal or distribution strategies. Some countries have mandatory distribution schemes. Whether CFP Level 2: Module 1 – Retirement Planning - Global Page 96

or not this applies, because the primary purpose of building a retirement fund is to use it, most people will begin taking distributions from their accounts when they enter retirement. There are many distribution strategy theories and we will explore a few of them. Sources of Cash Flow in Retirement There is a difference between income and cash flow. Income in retirement is generated by dividends from equity investment and /or interest on fixed income investment. Some clients may also have passive income from real estate, the sale of a business or elsewhere. Cash flow, on the other hand, can come from dividends and interest, along with resources generated from the sale of assets, including liquidating investment principal. Cash flow provides a more broad-based source from which to generate payments to the client. For our purposes, we will focus on the broader measure of cash flow but will periodically use the income term when deemed appropriate. We have discussed about the bucket system, we suggested placing income-producing assets in the first bucket. This may be acceptable for high net worth individuals with enough assets to generate sufficient cash flow from dividends and interest. The average retiree, however, will need to include money from other assets in the first bucket. This money will come from selling the assets and placing the proceeds in the bucket (account), then using everything in bucket 1 to provide desired cash flow for two to three years. There is a reason for us to highlight this distinction and the process to address it. Increased longevity provides more opportunity for retirees to run out of money. The solution to proving adequate cash flow and protecting against running out of money is either to accumulate large sums or to keep as large a portion of accumulated assets as possible invested, while gradually liquidating amounts needed to provide cash flow. The longer-term investments can help offset purchasing power problems related to increased longevity. In our examples, we will assume a portion of accumulated assets will remain invested throughout much of the retirement period. Portfolio Distribution Strategies – Converting Capital Growth to Cash Flow Generation How much should be in each bucket? Let us assume following retirement cash flow scenario: Annual living expenses: Rs.6, 50,000 Annual healthcare expenses: Rs.1, 50,000 Annual travel expenses: Rs.100, 000 CFP Level 2: Module 1 – Retirement Planning - Global Page 97

Annual special purpose expenses: Rs.1, 00,000 (this can be for education, charitable, contributions, business development, etc.) Total annual expenses: Rs.10,00,000 In this example, first-year annual expenses total Rs.10, 00,000. Some of the amounts can be modified when needed, but this is a good starting point. If the annual requirement is Rs.10, 00,000, we need to plan for a given number of years, agree on an inflation rate and determine an acceptable rate of return. Let’s use 25 years for the retirement period, three per cent inflation and seven per cent discount rate (investment rate). The real (inflation-adjusted) rate of return is 3.8835. As a reminder, the equation to arrive at this rate is: Using the real rate to determine the amount needed at the beginning of retirement (with a financial function calculator), the keystrokes are: Begin Mode 25 N 3.8835 I 10, 00,000 PMT PV Solve -=1, 64, 30,460 We have assumed that the Rs.10, 00,000 is the actual first-year payment and does not need to be inflated as a first step. For this example, we will use a total funding need of Rs.164, 30,460. Using these numbers, and planning for two year’s funding in bucket #1 (for this example; some prefer three year’s funding; either choice is a valid approach), we should have Rs.20,00,000 in Bucket #1. We cannot plan for much, if any, investment return on this money, as it will be held in cash or cash equivalents. Any return will be negligible. That leaves Rs.1,44,30,640 for the remaining buckets. Bucket #2 should hold from two to ten years’ funding. In this bucket we will need to factor inflation along with some level of conservative investment return. We suggested that investments in the middle bucket should be limited to investment-grade bonds (intermediate term), senior and junior notes, preferred stock, high-grade blue-chip (dividend-paying) stocks and perhaps high-quality REITs. These are options that produce income and dividends, are considered conservative and fairly liquid/marketable (with the possible exception of some CFP Level 2: Module 1 – Retirement Planning - Global Page 98

REITs). A reasonable return assumption for this group of investments is around five or six per cent per annum. If we settle on six per cent, along with a three per cent inflation assumption (2.9126 net yield), the middle bucket should hold around Rs.88,20,000 (10 N; 2.9126 I; 1000,000 PMT = 881,7939 PV). That leaves Rs.5610640 (14430640 – 8820000) for the third, long-term, bucket. Bucket #3 can hold stocks, high-yield bonds, real estate, options and commodities (for clients with a higher risk profile), and other higher return assets. As the individual spends money from Bucket #1 each year, assets equivalent to Rs.10, 00,000 can be liquidated from Bucket #2 and moved in the first bucket. A corresponding amount can be moved from Bucket #3 to Bucket #2. Assets in the second and third buckets will continue growing and the individual should not be in danger of running out of funds. This assumes that a cushion has been built in for emergencies, extra medical expenses and other financial surprises. The preceding is just an example. It is not intended as a perfect solution for every situation. In fact, it may not be a perfect solution for any situation, but it does illustrate a workable starting point. Depending on the client’s situation, the number of years and amount going into each bucket can, and should, vary somewhat. Risk profile also comes into play as does the individual’s specific spending parameters. Some advisors add another bucket between numbers two and three, and sub-divide those buckets into three to five and five to ten year periods. In that scenario, the final bucket continues to hold long-term investments. Regardless of the exact approach, over time, most of the client’s assets are often held in bonds and conservative investments. This reduces potential growth, but it also decreases overall risk level and increases on going cash flow. Retirement Distribution Rates Beyond the Buckets The bucket system is one approach to retirement cash flow. For it to work well, relatively large amounts of assets are required. Not everyone is able to accumulate large retirement corpus, but they still have to live in retirement. Several researchers have suggested approaches that may be more appropriate for a broader group of retirees. A four-per cent distribution rate is a common conservative recommendation, designed to provide cash flow and maintain some level of funding throughout retirement. This means that a retiree with Rs.50,00,000 in assets would have to live on around Rs.2,00,000 annually. The exact withdrawal amount will depend on investment results each year, but four per cent does not provide much money for those who have accumulated a relatively smaller fund. CFP Level 2: Module 1 – Retirement Planning - Global Page 99

Layer Cake William Bengen, CFP, who was an early proponent of the four-per cent withdrawal, did additional research to suggest an alternative approach that would potentially generate more cash flow (Bengen, 2006). Bengen’s more recent work suggests building a layer cake. The various layers are modifications—special situations—that may affect withdrawal amounts. The main points of Bengen’s theory are highlighted below. Bengen continues to suggest a base withdrawal rate of 4.15 per cent. However, some more conservative individuals, especially those wanting greater security, may want to reduce the initial withdrawal rate back to four per cent or even further in some situations. On the other hand, those who are willing to accept more risk and more uncertainty by incorporating additional layers may be able to increase the initial withdrawal rate to more than seven per cent. The factors or layers Bengen suggests are:  Withdrawal scheme (foundation layer)  Asset allocation  Success rate (degree of confidence)  Rebalancing interval  Super-investor (normally capable of better-than-average returns)  Desire to leave a legacy  Time horizon Bengen focuses on four fundamental assumptions that must be determined for each individual. 1) Tax status of the portfolio: is it tax-advantaged or not? 2) Time horizon is the second crucial element. For how long does the individual expect to need cash flow? 3) A third factor is asset allocation 4) Fourth is how the portfolio is rebalanced. Another key factor is the required success rate—that is, the degree of confidence that everything will work and the money will last. More Equities; More Cash Flow? Other researchers have built on Bengen’s work over the succeeding years. Part of the problem they have tried to solve is the degree of equities required to produce desired cash flow, compared with the integral desire for increased portfolio safety. The four per cent withdrawal rate is one approach, and we have seen that Bengen was able to increase that percentage slightly. Building on some of Bengen’s research, Jonathan Guyton, CFP, wrote about possible ways to expand cash flow possibilities (Guyton, CFP Level 2: Module 1 – Retirement Planning - Global Page 100

Decision Rules and Max IWR, 2006). Guyton’s work suggests that, based in part on the portfolio percentage devoted to equities, it may be possible to increase the safe initial withdrawal rate to as much a 6.2 per cent. If an individual is willing to incorporate greater amounts of equities into his or her portfolio, it may be able to produce a higher, sustainable distribution rate. Without going into detail on the research, someone who is willing to increase equities to 65 per cent might be able to have an initial withdrawal rate around five per cent. By increasing equities to 80 per cent, the initial withdrawal rate might increase by another percentage point to around six per cent. Guyton’s work also requires withdrawal rate freezes based on poor market returns. This means that there is no inflation-adjusted withdrawal rate increase following a year in which the portfolio experiences a negative return. The obvious reason for this is an attempt to build sustainability into the retirement portfolio, while maximizing annual withdrawals. Additionally, inflation-related increases are capped at six per cent, even if actual inflation rates are higher. This would potentially have a negative impact on purchasing power, but is necessary to maintain the portfolio in keeping with the two confidence standards. The Equity Conundrum Notice that the studies of both Bengen and Guyton suggest that increasing portfolio equity percentages (to a point) can have a significantly positive impact on initial withdrawal rates and subsequent withdrawals, as well as overall portfolio sustainability. This should come as no surprise to even a casual student of investments. However, it is contrary to what many still consider to be the correct way to structure a retirement portfolio. That is, the percentage of fixed income and cash investments should be immediately and significantly increased upon entering retirement. A better approach appears to be moving the year’s required cash flow/withdrawals into cash, and leaving the rest of the portfolio invested in an appropriate allocation for the client. If Bengen and Guyton are right, how do we balance their approach against what others suggest as a more reasonable approach, in which equity investments are greatly reduced? Part of the answer lies in the size of the retirement portfolio. If an individual has a sufficiently large portfolio, he or she can afford to significantly reduce equity exposure in retirement. A four per cent withdrawal on a portfolio of $2 million, will provide the client with an annual cash flow of $80,000, enough to provide many people with a comfortable retirement lifestyle. The larger the asset pool the client can accumulate, staying consistent with his or her goals and risk profile parameters, the greater flexibility there will be in withdrawal percentage requirements. Unfortunately, as we have identified, a sizeable number of clients will not accumulate the amount of money needed to be as conservative with their retirement portfolio as they may desire. What can the advisor suggest for these clients? This is where the work by Bengen and Guyton provides assistance. By CFP Level 2: Module 1 – Retirement Planning - Global Page 101

carefully maintaining equity investment exposure during retirement, an individual may be able to increase withdrawals without compromising portfolio sustainability. For some, the bucket approach will work well. For others, closely balancing distribution rates with portfolio construction should help to provide on-going cash flow throughout retirement. Sequence Risk The bucket approach, and its variations, is an attempt to address sequence risk. Sequence risk refers to the potential that the retiree may experience lower than anticipated returns early in retirement. Poor investment results in the early years may result in the retiree running out of money or needing to significantly lower withdrawals. Since the amount withdrawn from a portfolio is based on the portfolio’s value, less money in the account means less money available for cash flow. A recent paper clarified the problem (Frank & Blanchett, 2013): “The fundamental withdrawal rate (WR) formula is portfolio value ($X) times a withdrawal rate (WR%) to equal the annual distribution amount ($Y). Therefore WR% = $Y / $X. Because sequence risk relates to the order of returns, especially negative returns, as the denominator value $X (or portfolio account balance) decreases, the inverse relationship forces WR% higher, which translates to a higher probability of failure, a direct relationship with WR%.” In other words, to maintain any given distribution amount ($Y – which is a specific amount, not a percentage), if portfolio value ($X) decreases, the withdrawal rate (WR) must increase. The reverse also is true. If $X increases, WR can be reduced if the client is maintaining $Y. For example, assume a $5,000 withdrawal amount ($Y). If the portfolio value ($X) is $100,000, the withdrawal percentage (WR) is 5,000 / 100,000 = .05 If the portfolio value ($X) decreases to $90,000, the WR must increase to .056 if the retiree maintains the $5,000 withdrawal amount (5,000 / 90,000 = .05556). Conversely, if the portfolio value increases to $110,000, the WR becomes .045 with a $5,000 withdrawal amount (5,000 / 110,000 = .04545). In an investment environment where the portfolio value drops by 20% or more (as an example), to maintain a fixed withdrawal amount, the withdrawal percentage must be increased even more. This shows the potential problem of sequence risk when a retiree tries to withdraw a fixed amount all the time and experiences an investment market environment that is negative. If sequence risk is a problem, how should it be addressed? The paper’s authors summarized their findings as follows: CFP Level 2: Module 1 – Retirement Planning - Global Page 102

 While a distribution portfolio's exposure to sequence risk changes over time, sequence risk never really goes away unless the withdrawal rate is constrained considerably.  A practical method for advisors to measure this exposure to sequence risk is through evaluation of the current probability of failure rate. To do this, you can run a Monte Carlo simulation using current (i.e., updated) portfolio values, rates of return, amounts withdrawn, etc. You may have done this at some prior point, but you can (and likely should) run a simulation again to reflect updated data. It can be especially important to accurately reflect money that has been spent, because this will reflect the current portfolio value (when coupled with returns received).  The distribution period should be measured primarily from a fixed-target end date rather than from the date of retirement (that is, based on life expectancy). This establishes a continuously reducing period of remaining years that reflects the distribution period likely to be experienced by retirees. In other words, keep working with the years remaining for anticipated life expectancy, rather than simply assuming a number of years at the beginning of the retirement period. The years, and therefore distribution period, should be adjusted for every year the retiree lives, creating an annually decreasing distribution period.  Advisors may use three methods to evaluate and/or reduce the exposure of a portfolio to sequence risk:  Adjust WR% as market return trends suggest – that is, if market returns are trending lower, reduce the withdrawal percentage, if they are trending higher, you can increase the withdrawal percentage (or maintain the WR and increase the portfolio size).  Adjust portfolio allocation to mitigate exposure to negative market returns as market trends suggest – in other words, adjust the investment mix based on decreasing investment risk. This is not the same as market timing. Instead, it is better described along the lines of tactical or core/satellite asset allocation.  Start with a reduced WR percentage to reduce exposure to the impact of declining markets on the probability of failure  Reliance on a single simulation to be accurate for a lengthy distribution period is not prudent. Rather, the current likelihood of failure should be reviewed regularly to ensure the withdrawal is still prudent. The authors suggest on going evaluation of the potential risk, and recognition of the impact negative market returns can have. One potential solution is to start retirement using a lower withdrawal percentage than otherwise desired to mitigate against potential negative-return impact, and gradually increase the percentage, based on returns you have experienced along with the current rate of return, as appropriate. This approach is different from the bucket approach in that the authors do not indicate use of any portfolio segmentation to support current cash flow needs. The portfolio is considered as a whole. We can agree that decreases in portfolio value can have an impact on the retiree’s cash flow. Either the retiree will be forced to increase the withdrawal percentage to maintain a level amount of cash flow, CFP Level 2: Module 1 – Retirement Planning - Global Page 103

or keep the percentage the same, accepting reduced cash flow as a result. Neither option is particularly appealing, but may be required if sequence risk is significant. Portfolio Distribution Options The primary purpose of accumulating assets in a retirement portfolio is to generate cash flow throughout retirement. It may seem unnecessary to repeat this, but advisors sometimes forget that the distribution phase can be as, or even more, important than the accumulation phase. An unsustainable distribution or withdrawal plan can mean the retiree’s final years may be spent in fear of not having enough money. Even though we have explored the science of retirement planning, the process also requires much art. A large portion of that art relates to retirement distributions. We may start with a four to five per cent distribution scheme, but from there, the scheme would have to regularly be evaluated and modified based on current events (e.g., market returns, inflation, etc.), changes in the client’s life, shifts in goals, and any number of other factors. It is easy to anticipate the need to adjust portfolio distributions (and allocations) based on changes in the economic environment. Some other changes, that cannot be anticipated, may have an even greater impact. Revisit Sam Suppose Sam had a daughter who was married with two young children. The daughter and her husband jointly decided that she would remain home to raise the children. Sam loves his daughter and his grandchildren, and had been allocating some retirement assets into a higher-education fund for them. Things were proceeding as planned, until the husband died in an accident. He had been the sole source of income, and, because he and his wife had not been working with a financial advisor, they had little in the way of life insurance. Sam’s daughter and grandchildren lost their home, and had nowhere to live. Sam made the decision many parents would make. He invited his daughter and grandchildren to live with him. While that was a generous and loving choice, it had a major impact on Sam’s retirement cash flow needs. Now, instead of just taking care of himself, Sam needed to provide for three other people. Situations like this happen many a times, and provide one good reason to retain retirement portfolio flexibility. It doesn’t matter whether Sam’s decision financially was wise or not, it is the decision he made, and clients frequently make similar decisions. The question before Sam’s advisor is, what portfolio allocation and distribution changes must be made to support Sameer’s decision? Let’s understand the financial situation a little. The addition of Sam’s daughter and grandchildren doubled his monthly household living expenses. Sam’s home mortgage is fully paid, and his existing CFP Level 2: Module 1 – Retirement Planning - Global Page 104

home is large enough to house everyone, so housing expenses are not impacted. His portfolio is currently allocated in a fairly conservative manner – a little below Sam’s optimal risk profile threshold. This is what Chapter 2 said about Sam’s finances as he approached retirement: Toward the end of his career, if Sam is typical, he will have his highest earning years. In fact, let’s assume his annual income has quadrupled from when he started working to $80,000. Sam now has a choice. He can either start playing or he can continue to increase his savings. Thankfully, on the good advice from his financial advisor, Sam invested $20,000 each of the five years prior to retirement. With a three and a-half per cent inflation and seven per cent investment return Sam was able to add approximately $123,000 to his retirement funds, resulting in the potential for additional annual income of $6,377.  5N  7.0 I/YR  20,000 PMT  Solve for FV = 123,000 (BEG mode) Then  30 N  3.3816 I/YR [(1.07/1.035) – 1 x 100]  123,066 (PVAD)  Solve for PMT = 6,377 For purposes of this scenario, assume that Sam has accumulated enough money so that, in addition to his pension, he was financially comfortable . . . until his daughter and grandchildren arrived. Sam has monthly living expenses of $1,000 ($12,000 per annum), in addition to his pension. Sam’s retirement portfolio provides him with $10,000 above annual his expenses, including the $6,377 discussed above. However, since his daughter and grandchildren have doubled his monthly living expenses, they have consumed the excess, plus at least $2,000 per month more. As Sam’s advisor, he has asked you to help him determine possible ways to modify his portfolio and/or distribution plan to help meet his new financial requirements. As you consider Sam’s request, answer the following questions: 1. What should you ask Sam to help you better understand the situation and develop possible solutions? 2. What portfolio changes would you suggest that Sam make to generate enough additional cash flow to correct his monthly shortfall? 3. If Sam has to take money from his portfolio, what is the anticipated long-term impact? CFP Level 2: Module 1 – Retirement Planning - Global Page 105

4. Are there any government (or other) benefit programs that might help support Sam’s daughter and grandchildren? 5. Is there any way Sam can access additional funds from his government pension? If he does so, will any penalties or income-tax implications apply? 6. Are there any other changes, adjustments, or suggestions you have for Sam? You may want to consider Sam’s options for a time before making any recommendations. For now, recognize that life will present challenges to clients, just as it does prior to retirement. Good retirement planning, therefore, requires flexibility along with the recognition that disruptions and other factors will require one or more plan changes. We have already discussed retirement-plan buckets as a way to segment the portfolio. It may be worthwhile to think in terms of additional segmentation by dividing the portfolio into different capital consumption pools (Kreitler, 2006). 1. Lifetime income: this pool is designed to provide guaranteed income for life. All capital will be depleted by the time of death. Any source, such as annuities, that can provide a guaranteed income stream fits into this pool. 2. Preserved capital: this pool is a traditional investment portfolio holding stocks, bonds, and any other appropriate securities. This, too, is designed to contribute to cash flow for the retiree’s life. However, unlike the first pool, the retiree likely does not plan to fully deplete all capital, and plans to leave any remainder to heirs or other beneficiaries. 3. Medical reserve: we have discussed the potential impact medical expense can have on a retiree’s cash flow. This pool is a fund that can be reserved to meet excess medical costs that may occur as the retiree ages. In addition to portfolio assets, this pool may include long-term care or other insurance to cover medical expenses. 4. Capital consumption: this pool is set aside to provide additional cash flow by drawing down capital. Since cash flow will be generated not only by interest payments, or other income- generating investments, but also by depleting principal or capital, this pool can have a large positive impact on cash flow (recognizing that when the money is gone, there will be neither earnings nor cash flow generation). There are actually two pool categories in this section:  The first pool typically takes money from the second pool to purchase an immediate annuity.  The second pool is a holding place for any capital not being used by the other pools. These funds can be used for things like travel, gifts, charitable contributions, and similar. As with the other suggestions we have made, the capital-consumption pool distribution does not reflect the only method for structuring a distribution plan. It is intended to help the advisor think through options that might be used to help guide a client through retirement. CFP Level 2: Module 1 – Retirement Planning - Global Page 106

Question Increased longevity provides more opportunity for retirees to run out of money. The investing goal has been to accumulate enough assets to generate the desired level of sustainable cash flow in retirement with a reasonable cushion. Upon entering retirement, the goal shifts to working with sustainable withdrawal or distribution strategies. One distribution strategy theory is the bucket system. Emergency funds should be saved in a cash or cash equivalent account in the “ first bucket.” The \"second bucket\" is a typically well diversified portfolio for the intermediate-term and longer-term, higher risk, higher returns investments are held in a \"third bucket\". Your client has annual expenses of $100,000 and you have agreed to assume 25 years for the retirement period, three per cent inflation and seven per cent discount rate (investment rate). Use the real rate to determine the amount needed at the beginning of retirement. Use this number and then plan for two year’s funding in bucket #1 in cash and emergency funds. Bucket #2 will hold 12 years of funding. In this we will be more conservative and assume a six per cent investment return and continue with the three per cent inflation. The second bucket should most likely hold an inflation adjusted amount closest to: a $1,029,756 b $1,443,046 c $413,290 d $981,578 Correct Answer A Explanation Step 1: Q is asking inflation-adjusted retirement cash flow. ((1.07/1.03)−1)×100=3.88350.Step 2: Calculate amount needed in fund for 25 years Longevity Mode = BGN, P/Y = 1, N = 25, I/Y = 3.88350, PMT = 100,000, FV = 0, CPT PV =1,643,046 . Step 3: We should have $200,000 in Bucket #1. This leaves $1,443,046 for Buckets #2 & 3. Step #4: Adjust Real rate for Bucket #2 ((1.06/1.03)−1)×100= 2.91262 Step #5 Calculate amount for Bucket #2. BGN, P/Y = 1, N = 12, I/Y = 2.91262, PMT = 100,000, FV = 0, CPT PV = 1,029,756. Bucket #3 would therefore be $1,443,046 - 1,029,756 = 413,290 CFP Level 2: Module 1 – Retirement Planning - Global Page 107

Distractor #1 b This is the PV for all three buckets Distractor #2 Distractor #3 c This is the amount for Bucket #3 d Uses I/Y = 3.88350 - forgot to lower the discount rate for the bucket #2 calculation Impact of Taxes on Retirement Cash Flow Some incomes from investments are taxable and some partially taxable. Some incomes are tax free as well. Income taxes can produce a significant drain on retirement cash flow. The amount of taxation is important to retirees, because it determines the net benefit they receive. As a simple example, there is a significant different between Rs.30, 000 monthly benefit with no taxation and a similar benefit taxed at 20 per cent. The 20 per cent tax results in a net benefit received of only Rs.24000, which may result in the retiree not being able to meet expenses. Generally speaking, taxes on retirement benefits tend to be lower than those on regular earned income, because income is lower, putting the individuals into a lower tax bracket, but they still can significantly impact overall cash flow. This is especially true when retirees have accumulated enough money to provide large amounts of retirement income. We know that income taxes can be a significant drain on retirement cash flow, what can clients do to control or reduce taxation? The most obvious solution is to place assets into non-taxable savings/investment vehicles. Many territories have vehicles with earning that are not subject to income tax. These may be bonds (e.g., government, municipal, special purpose), money market, insurance-based or similar. Equities in taxable accounts are often subject to lower tax treatment (e.g., capital gain). Insurance products – either life insurance or annuities – may offer reduced or no income taxation on internal growth of cash value accounts. The tax-free status of investment-related earnings varies so much from jurisdiction-to-jurisdiction that financial advisors will be well-advised to research and become familiar with opportunities in their own territory. Some retirement plan distributions have no income tax, while others are taxed, but on a reduced basis. When building a retirement portfolio, the financial advisor and client should consider the future taxability of asset location – within or outside of retirement accounts. Distributions from these may be fully taxed, partially taxed, or tax free. Remember, advisors should fully explore and become familiar with options in their territory. Some investment returns will be fully taxable when withdrawn and some will be distributed tax free. What distribution recommendations should the advisor make? A big part of the answer rests in whether there is a distribution requirement at some future point. Some tax authorities are only willing CFP Level 2: Module 1 – Retirement Planning - Global Page 108

to defer taxation, not eliminate it. As a result, they demand that assets in tax-deferred retirement accounts begin the distribution process at a given age or after a certain number of years. As an example, most tax-qualified retirement accounts in the U.S. require minimum distributions to begin by 1 April following the year in which the individual reaches age 70 ½. Some of Japan’s defined contribution plan accounts must begin distributions no later than age 70. Other programs have no required date by which distributions must begin. Whether minimum distribution requirements exist in your territory will help determine the order in which retirees should take distributions from various account types. Also, when one or more accounts require taking minimum distributions by a particular date, be sure the client does so. Otherwise, he or she may have to pay additional taxes or penalties. Important to Note: There is an old piece of guidance related to choosing investments that is worth repeating, “Don’t let the tax tail wag the investment dog.” This means that tax implications should be kept in perspective, while other/greater factors rise to the top of the consideration list. When planning retirement distributions, this guidance is especially prudent. Greater consideration should be given to maintaining investments that produce especially good cash flow and liquidating those that are underperforming or simply not as useful a part of the overall retirement portfolio. While it’s true that tax implications must be factored into the overall plan, they should be secondary to broader portfolio and cash flow considerations. Having given that bit of caution, it is worth remembering that receiving a large amount of tax-deferred funds on which taxes must be paid can significantly impact financial resources available for other purposes. When possible, and keeping in mind the relevant cautions, balancing withdrawals from tax- free (or reduced tax) and fully taxable accounts is wise. Sometimes it may be possible to delay tax- deferred distributions until a time when other income is reduced enough that the individual is in a lower tax bracket. In some ways, this can make the most sense (from a tax-planning perspective) for retirement distributions. Remember, work with qualified tax professionals or provide referrals to qualified tax professionals. Do not provide advice outside of your expertise or that you are not licensed to deliver. Question Increased longevity provides more opportunity for retirees to run out of money. The investing goal has been to accumulate enough assets to generate the desired level of sustainable cash flow in retirement with a reasonable cushion. Upon entering retirement, the goal shifts to working with sustainable withdrawal or distribution strategies. There are several distribution strategies and theories. A four-per cent distribution rate is a common conservative recommendation. You and your client have agreed that 4% of the portfolio’s value will be distributed from an CFP Level 2: Module 1 – Retirement Planning - Global Page 109

Correct Answer investment account into a current bank account in January based on the Explanation portfolio’s value at the end of the previous year. In the previous year, the diversified portfolio started the year at Rs.75, 00,000 but suffered a Distractor #1 decline of -4.7%. The amount of the current year distribution is most likely closest to: Distractor #2 Distractor #3 a Rs2,85,900 b Rs.3,00,000 c Rs.3,52,500 d Rs.3,35,930 A 75,00,000 x .953 = 71,47,500 value of portfolio at the end of the previous year x .04 distribution rate = Rs.2,85900 b This is 75, 00,000 x 4% - the beginning of the previous year value. Not the end of the previous year value. c This is the value of loss of the portfolio in the previous year. d 7500000 x .953 = 7147500 x .047 = 335930 Summary This course explored retirement planning to prepare the student to develop strategies and use techniques for wealth accumulation and withdrawal during retirement years; taking into consideration asset locations and the client’s personal financial goals, risk tolerance, risk capacity, and structure and impact of public and private retirement plans on the client’s financial plan. The course also considered that, in most cases, neither the government nor employers can be counted on to provide 100 per cent of an individual’s retirement cash flow need. While it may be true that some base level of retirement cash flow will be provided in some territories, when put into the context of maintaining a desired standard of living, most people will need to contribute – sometimes substantially – to funding their retirement. CFP Level 2: Module 1 – Retirement Planning - Global Page 110

Retirement Planning 1. Collection 1.1 Collect Quantitative Information 1. Collect the details of potential sources of retirement income 2. Collect the details of estimated retirement expenses 1.2 Collect Qualitative Information 1. Determine the client’s retirement objectives 2. Determine the client’s attitudes towards retirement 3. Mutually agree on the client’s comfort with retirement planning assumptions 2. Analysis 2.1 Assess the Client Situation 1. Develop financial projections based on current position, including any gap between income needs and funding 2. Determine if the client’s retirement objectives are realistic 3. Examine potential retirement planning strategies 2.2 Identify and Evaluate Strategies 1. Assess financial requirements at retirement to maintain desired lifestyle 2. Assess the impact of changes in assumptions on financial projections 3. Assess trade-offs necessary to meet retirement objectives 3. Synthesis and Recommendation 1. Develop retirement planning strategies 2. Evaluate advantages and disadvantages of each retirement planning strategy 3. Optimize strategies to make retirement planning recommendations 4. Prioritize action steps to assist the client in implementing retirement planning recommendations 5. Discuss with the client the impact of changes in assumptions on financial projections CFP Level 2: Module 1 – Retirement Planning - Global Page 111

CFP Level 2: Module 1 – Retirement Planning - Global Page 112

RETIREMENT PLANNING (INDIA) CFP Level 2 - Module 1 - Retirement Planning - India Page 113

CFP Level 2 - Module 1 - Retirement Planning - India Page 114

Chapter 1: The Characteristic India Demography, Family and the Retirement Preparedness India demography 1.1 A young India with low old age dependency ratio India is the second most populated country in the world with nearly a fifth of the world's population. According to the 2019 revision of the World Population Prospects [6][7] the population stood at 1,352,642,280. Between 1975 and 2010, the population doubled to 1.2 billion, reaching the billion marks in 1998. India is projected to surpass China to become the world's most populous country by 2024.[8] It is expected to become the first country to be home to more than 1.5 billion people by 2030, and its population is set to reach 1.7 billion by 2050.[9][10] Its population growth rate is 1.13%, ranking 112th in the world in 2017.[11] India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. In India, Bihar, West Bengal, Uttar Pradesh and Madhya Pradesh are the most populated states. Sex ratio in India apart from Kerala is male vs female: 1000:920 The average literacy rate of the country is about 74%, with 82% of the male population and about 65% of the female population being educated Many Asian economies like Japan, China & South Korea have seen the golden periods of double digit GDP growth In our country numbers of youths are more so they can contribute to country’s productivity. CFP Level 2 - Module 1 - Retirement Planning - India Page 115

However, as more and more people get into the working age group, the number of jobs and the skills required to consistently remain beneficial to the economy will be a challenge that the government would have to resolve. 1.2 Improving Life Expectancies, other Potential Disruptions to India Demography The current life expectancy for India in 2020 is 69.73 years, a 0.33% increase from 2019. The life expectancy for India in 2019 was 69.50 years, a 0.33% increase from 2018. The average life expectancy of male is around 68 and female around 70. In India working population between the age of 20 to 50 is around 50% of total population. Around 5% of total population being above the dependent age of 65. World population has gone up to about 7.5 billion today. Global population continues to grow but has slowed down and is distributed more towards the underdeveloped countries than towards the advanced economies. Several advanced economies like Italy, Japan, Germany, South Korea, and Singapore have abundant resources today however have the challenge of automation replacing its human resources. Couple that with the rapidly increasing ageing population as life expectancy increases and birth rate decreases in advanced economies presents a higher challenge for the working population. In such a scenario a young country like India where automation is still underway, the opportunity for the economy and its youth is immense. The challenges before the government though would be to maintain a consistent supply of good education to keep the working age population skilled enough to carry out its jobs, decent employment opportunities to take full advantage of the capabilities of the young working class and a good health infrastructure to take care of its young and ageing population which will be a minority for these years. It will be a necessity for the young workers to keep themselves up skilled at all times, gainfully employed while maintaining their aspirational expenses in check and begin a saving program early not just for the later-age retirement but also for an untimely loss of job or gap in employment. CFP Level 2 - Module 1 - Retirement Planning - India Page 116

1.3 Fiscal Constraints to deal with Large-scale Social Security Programs Social security is a government led program where it provides assistance to its citizens to live through the phase of their lives, where there is no or inadequate income, providing them with monetary benefits for their survival and sustenance. While a great deal of the Indian population is in the unorganized sector and may not have an opportunity to participate in each of these schemes, Indian citizens in the organized sector and their employers are entitled to coverage under the above schemes. There are two major social security plans in India, the Employees’ Provident Fund Organization (EPFO) and the Employees’ State Insurance Corporation (ESIC). The EPFO runs a pension scheme and an insurance scheme. All of these are supposed to grant EPFO members and their family’s benefits for old age, disability, and support in case the primary breadwinner dies. The ESIC covers low-earning employees providing them with basic healthcare and social security schemes. Originally aimed at factory workers, the coverage was extended to include greater parts of the population, e.g. employees in hospitals or educational institutions. The ESI scheme has been implemented in all states excluding Manipur and Arunachal Pradesh. Social security schemes for unorganised sector: In order to provide social security benefits to the workers in the unorganised sector, the Government has enacted the Unorganised Workers Social Security Act, 2008. Some of the welfare schemes for unorganised workers stipulated under this act are: 1. The National Social Assistance Programme (NSAP), launched in 1995 is a Centrally Sponsored Scheme of the Government of India that provides financial assistance to the elderly, widows and persons with disabilities in the form of social pensions. 2. Janani Suraksha Yojana (JSY), launched in 2005, is a safe motherhood intervention under the National Rural Health Mission (NRHM) being implemented with the objective of reducing maternal and neonatal mortality by promoting institutional delivery among the poor pregnant women. 3. Rajiv Gandhi Shilpi Swasthya Bima Yojana aims at financially enabling the artisans’ community to access to the best healthcare facilities in the country. This scheme covers not only the artisans but his wife and two children also. CFP Level 2 - Module 1 - Retirement Planning - India Page 117

4. National Scheme of Welfare of Fishermen aims at providing better living standards for fishermen and their families and social security for active fishers and their dependants. 5. Aam Admi Bima Yojana, launched in 2013, is a social security scheme aimed at unorganised sector workers aged between 18 and 59 years, which offers a cover of Rs 30,000. 6. Rashtriya Swasthya Bima Yojana (RSBY), launched in 2008, aims to provide health insurance coverage to the unrecognised sector workers belonging to the BPL category and their family members. It provides for inpatient medical care of up to ₹30,000 per family/year in public as well as empaneled private hospitals. Recently launched schemes Atal Pension Yojna (APY)  Under the APY, subscribers would receive a fixed minimum pension at the age of 60 years, depending on their contributions, which itself would vary on the age of joining the APY.  The Central Government would also co-contribute 50 percent of the total contribution or Rs. 1000 per annum, whichever is lower, for a period of 5 years, who are not members of any statutory social security scheme and who are not Income Tax payers.  The pension would also be available to the spouse on the death of the subscriber and thereafter, the pension corpus would be returned to the nominee.  The minimum age of joining APY is 18 years and maximum age is 40 years. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY):  Under PMJJBY, life insurance of Rs. 2 lakh would be available on the payment of premium of Rs. 330 per annum by the subscribers.  The PMJJBY will be made available to people in the age group of 18 to 50 years having a bank account from where the premium would be collected through the facility of “auto-debit”. Pradhan Mantri Suraksha Bima Yojana (PMSBY):  Under PMSBY, the risk coverage will be Rs. 2 lakh for accidental death and full disability and Rs. 1 lakh for partial disability on the payment of premium of Rs. 12 per annum. CFP Level 2 - Module 1 - Retirement Planning - India Page 118

 The Scheme will be available to people in the age group 18 to 70 years with a bank account, from where the premium would be collected through the facility of “auto-debit”.  Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) Yojana: Under the scheme, the government has promised a direct payment of Rs. 6000 in three equal instalments of Rs. 2000 each every four months into the Aadhar bank accounts of eligible landholding Small and Marginal Farmers (SMFs) families. Pradhan Mantri Kisan Mandhan Yojana:  Honourable Prime Minister Narendra Modi recently launched a pension scheme for farmers from Ranchi, Jharkhand.  Under the scheme, farmers between 18 and 40 years of age will get Rs 3,000 monthly pension after reaching 60.  The scheme has an outlay of Rs 10,774 crore for the next three years.  All small and marginal farmers (with less than 2 hectares) who are currently between 18 to 40 years can apply for the scheme.  Registration for the farmers’ pension scheme was started on August 9,2019.  Life Insurance of India (LIC) has been appointed insurer for this scheme.  The farmers will have to make a monthly contribution of Rs 55-200, depending on the age of entry, in the pension fund till they reach the retirement date.  This is an optional scheme.  The government started registrations for the Pradhan Mantri Kisan Maan-Dhan Yojana (PM-KMY) on August 9,2019.  The enrolment for the voluntary scheme is being done through the Common Service Centres (CSCs) located across the country.  No fee is charged for registration under the scheme.  The Centre pays Rs 30 to CSC for every enrolment to ensure that the scheme witnesses maximum coverage. Pradhan Mantri Laghu Vyapari Mandhan Yojana, 2019:  The new scheme that offers pension coverage to the trading community was launched from Jharkhand.  Under the scheme, all shopkeepers, retail traders and self-employed persons are assured a minimum monthly pension of Rs. 3,000/- month after attaining the age of 60 years. CFP Level 2 - Module 1 - Retirement Planning - India Page 119

 All small shopkeepers and self-employed persons as well as the retail traders with GST turnover below Rs. 1.5 crore and age between 18-40 years, can enrol for this scheme.  The scheme would benefit more than 3 crore small shopkeepers and traders.  The scheme is based on self-declaration as no documents are required except Aadhaar and bank account.  Interested persons can enroll through CSCs across the country.  To be eligible, the applicants should not be covered under the National Pension Scheme, Employees’ State Insurance Scheme and the Employees’ Provident Fund or be an Income Tax assessee.  The Central Government will make matching contribution(same amount as subscriber contribution) i.e. equal amount as subsidy into subscriber’s pension account every month.  Five crore traders are expected to join the scheme in the next three years. Social Security schemes are very important aspect of one’s later life. Most of people will reach a stage where he will not be able to earn his livelihood due to his bad health or due to old age. He will not be interested to earn. For these people social security program is very important for them. These programs could serve well even in times of unexpected events of death, disability, loss of job, sabbaticals or a temporary gap in employment. There are several types of social security programs meant for various kinds of citizens – for the retired, for the disabled, for the widows and also for those who don’t have adequate income. Over the past couple of years, India’s GDP growth has been among the fastest in the world. The government has always been fairly optimistic of its capability to deliver higher GDP growth rate year on year with the target of becoming a 5 trillion USD economy by 2024. At a current GDP of 2.74 trillion USD, India will have to grow at a nominal rate of 12% p.a. to get to its 5 Trillion USD economy target. The government is the biggest spender in India’s economy and its spending on infrastructure, capital investments and social benefit programs does definitely have a multiplier effect on the Indian economy. However, with a 135 crore population, the ability of a government to deal with large scale social security programs can become difficult. CFP Level 2 - Module 1 - Retirement Planning - India Page 120

India has several schemes that are a part of its social security endeavor – Employee Provident Funds, Employee Pension schemes, Employee Deposit Linked Insurance Schemes, Gratuity Act, Health benefits under the Employees State Insurance Act, Workmen’s Compensation Act, Maternity Benefits Act, etc. But with the constraints on the government’s spending power and the magnitude of the population to be covered, increasing funds available for social security measures becomes difficult. Implementation of policies such as bringing working women’s maternity benefits at par with the world’s developed countries has implications of gender discrimination at the work place – since the government faces fiscal constraints in sharing the financial burden of the maternity leave pay with the employer Implementation of policies such as bringing working women’s maternity benefits at par with the world’s developed countries has implications of gender discrimination at the work place – since the government faces fiscal constraints in sharing the financial burden of the maternity leave pay with the employer As a result of which, the citizens are left with fewer options but to focus their working life on saving and planning ahead for not just current expenditure but also later-stage requirements. Explain characteristics of the Indian family unit 1.4 A typical Indian Family - Three generations living together is still more common It is very common to find three or four generations of family members all living together under one roof- dependent upon each other for their social, psychological and monetary requirements. Often, parents in their old age depend upon their children to take care of their day-to-day and medical needs. Women in their maternity and post maternity periods depend upon their mothers and mothers-in-law for childcare and support. Co-dependence on family members of a weaker member who has a disability, has lost a spouse or has lost a job – gives the necessary cushion to an individual to sustain without being worried about the future- so, planning for retirement, maternity, childcare, sickness, disability, personal accidents often is not a priority for Indian families. CFP Level 2 - Module 1 - Retirement Planning - India Page 121

Now nuclear family system is increasing in India, therefore one has to be independent for survival. They must think about retirement planning. No wants to be dependent on others duing post retirement life. Even in case of disability or death, family gets benefit from insurance companies if plans accordingly. 1.5 Other seemingly prior goals and obligations delay or disrupt retirement savings Retirement is one of the most important goal of everyone but many people consider it least important. People give priorities to the following goals: Children’s school and college education Children’s marriage goal, Setting up business for children World tour goal Purchasing big car. Purchasing a big house. In the race to get ahead in one’s career and raise a family alongside, saving for retirement is barely a thought. While, some of these expenditures are important and cannot be done away with or postponed, for e.g. education of one’s children – an expenditure which simply cannot be compromised on. Generally people who plan for retirement goal and invest in mutual funds or insurance plans, sometimes they have to withdraw for the expenses of child education, child marriage, for some other requirement. Doing this they will short of funds at retirement. However, many of these expenses can be pruned or postponed to maintain one’s savings for the later age and stage of life. It is often noted that the purchase of a large asset like a house or a car during this life stage takes away significant savings and creates liabilities that eat away a chunk of the regular income. Therefore everyone should priorities of financial goals and accordingly to invest money. CFP Level 2 - Module 1 - Retirement Planning - India Page 122

1.6 Late Marriages and subsequent goals blur usual Life Stages A normal human being has several life stages- infancy, early childhood, adolescence, adulthood and old age. The average age at which Indians get married has gone up in the past 20 years. The average age of marriage for an Indian male that used to be in the range of 22-25 years in the 1990s is estimated to have gone up to 27-30 during recent times. Late marriages have compounded the problems of savings and spending patterns for the Indian couple. Buying a house, buying or upgrading a car, traveling, medical expenses, bearing and raising children, putting them through school and college, their marriage, parental health and medical care due to old age - pushes out the entire life cycle of one’s basic objectives to the age of 50-55. By this time, the individual is physically less capable of working himself and realizes that he is closer to his last life stage – old age or retirement period. This is the time most people scamper to get their resources together and seek help, which is often too close to the beginning of their consumption period – i.e. retirement often leading to a diminished quality of retired life over one’s entire working lifetime. lot of Indian parents tend to focus on their children to be their most important goal - the education of their children, their marriages, buying a house or other material things for them in order to “settle them down” make them often keep their own retirement and medical needs in the old age, at lower priority Although it is an individual’s choice to priorities one goal over the other,[1] [SB2] it is up to an adviser to raise his client’s attention in this area and provide data-driven guidance to bring some focus to his own later-stage needs. An understanding of the individual’s sensitivities and the priorities is necessary to guide him in an informed, mathematical yet sensitive manner to balance the current needs of the family with the future needs of their own requirements without the need to depend on anyone for the later years. CFP Level 2 - Module 1 - Retirement Planning - India Page 123

Chapter 2: Pension Reforms in India Old Age Social and Income Security (OASIS) Project 1.0 Project OASIS (Old Age Social and Income Security) In India, the Ministry of Social Justice and Empowerment is entrusted with the nodal responsibility for care of older persons and concerned with the issues of ageing, health and income security during old age. However, the Ministry realises that poverty alleviation programmes alone cannot provide a solution to the income and social security problems of the elderly. For instance, providing a Rs.100 per month old age pension to the projected 175 million population of the elderly in 2025, would translate into an annual outflow of over Rs.21, 000 crore for the Government. As a culmination of this growing concern, in August 1998, the Ministry commissioned the national Project titled “OASIS” (an acronym for Old Age Social and Income Security) and nominated an 8 member Expert Committee to examine policy questions connected with old age income security in India. The Project OASIS Expert Committee was mandated to make concrete recommendations for actions that the Government of India can take so that every young worker can build up a stock of wealth through his or her working life, which would serve as a shield against poverty in their old age. The research and recommendations under Project OASIS had a twin focus: (1) that of further improving existing provisions, and, (2) to devise a new pension provision for excluded workers who are capable of saving even modest amounts and converting this saving into an old age income security provision. The interim Report on reforms to the existing provisions was submitted to the Ministry of Social Justice and Empowerment in February 1999, followed by another report in January 2000. 1.1 Objective of the Report The objective of this Report is to recommend a pension system which can be used by individuals spread all over India, which enables them to attain old age security at the price of modest contribution rates through their working career. It is simple and convenient to use and CFP Level 2 - Module 1 - Retirement Planning - India Page 124

has the capability for converting modest contributions into reasonably large and comfortable sums in an almost risk-free manner for old age security. 1.2 Goals It is clear that anti-poverty programs will simply not suffice in addressing the problem of old age income. The sheer number of the elderly is too large, and the resources with the State are too small. The economic security during old age should necessarily result from sustained preparation through lifelong contributions and the central values that a pension system should emphasise are self-help and thrift. In this context, the goals to be achieved through the recommendations made in the report are as under: (1) To establish an institutional infrastructure for an efficient pension system. (2) To evolve a simple and affordable pension system for the workers in the un-organised sector. (3) Not to have an exclusive focus on tax incentives as a vehicle to encourage pension savings. (4) To have a sound pension planning which can be achieved by two factors: (a) by obtaining continuous, uninterrupted accumulations and (b) by using sound fund management to achieve the highest possible rates of return. Once these two ingredients are in place, the arithmetic of compound interest over multiple decades generates remarkable income security from even modest flow of savings. (5) To improve the rate of return without sacrificing long-term safety of funds by appropriate modifications in investment guidelines, and by entrusting funds to professional managers. (6) To have sound governance and sound pension system design. From a political economy perspective, a large stock of pension assets is a dangerous thing. Pension programs face large political risk. Pension systems in all countries have faced pressures from a host of special interest groups who seek to obtain “minor” alter- ations of pension-related policies in order to benefit themselves. (7) To obtain low administrative costs, nation-wide collection, and adequate simplicity for participation by millions of people with highly limited financial sophistication. The challenge also lies in obtaining freedom from fraud, and in resisting the pressures which seek to apply pension assets to further any agenda other than that of old age income security of members. CFP Level 2 - Module 1 - Retirement Planning - India Page 125

(8) To encourage regular savings, however small they may be. Research commissioned by Project OASIS shows that regular savings at the rate of between Rs.3 to Rs.5 per day through the entire working life easily suffice in escaping the poverty line in old age provided the pension assets are invested wisely. (9) To strive towards creating an equitable environment and simplified provisions to encourage universal coverage both for salaried employees as well as self-employed persons. (10) To make an enormous difference in the form of removing millions of people from the ranks of the destitute elderly in the years to come. Each additional person who is able to plan for old age income security is one less from the ranks that require the minimum support safety net in old age. This powerful motivation is the central inspiration for this Report. 2. Recommendations of Project OASIS 2.0 A New Pension System The new pension system should be based on individual retirement accounts (IRAs). An individual should create this account; have a passbook where he can see a balance that is his notional wealth at that point in time; he should control how this wealth is managed; this account should stay with him regardless of where he is or how he works. He would make contributions towards his pension into this account through his working life (whether employed in the organised sector or not), and obtain benefits from it after retirement for the rest of his life. 2.1 Individual Retirement Account A person will open a single Individual Retirement Account (IRA) with the pension system at as early a point in his life as possible. The account will provide the individual with a unique IRA number that will stay with the individual through life. The account would stay with the individual across job changes, spells of unemployment, and can be accessed at any location in India. The individual would always have access to an account balance statement showing his assets. All through, the individual would be empowered in having control of how his pension assets should be managed. Finally, upon retirement, the individual would be able to use his pension assets to buy annuities from annuity providers, and obtain a monthly pension. CFP Level 2 - Module 1 - Retirement Planning - India Page 126

2.2 Minimum Contribution The individual would save and accumulate assets into this account in his working life, subject to a minimum of Rs.100 per contribution and Rs.500 in total accretions per year. Individuals would be free to decide the frequency of accretions into their accounts; there will be no pressure to make a fixed monthly contribution. 2.3 Regulator y Framework In this entire process, a sound regulatory framework would give individuals an umbrella of safety with respect to problems of risk management and prevention of fraud. 2.4 Points of Presence (POPs) A key feature of the system described ahead is a high ease of access to the pension system through myriad Points of Presence (POPs) which would be located all over India and will include post offices, bank branches, etc. The individual would be able to visit any POP in India (not just the POP where he had opened the IRA) and conduct transaction on his individual retirement account. Every POP would exhibit identical features, processes and procedures. These transaction would be extremely simple and convenient, so as to require minimal knowledge about the financial sector. 2.5 Full Portability Individual accounts imply full portability: i.e. the individual would hold on to a single account across job changes across geographical locations. Individual accounts will also give individuals the opportunity to alter their risk profile in the life cycle in an optimal fashion (from high-risk, high-return investments at a young age to a low-risk, low-return portfolio when approaching retirement) if they so desire, while allowing them full freedom and flexibility in making their own choices. Individual accounts also interpret individual accumulations as individual wealth; they eliminate the free-rider problem of collectivist programs. The accumulation of retirement assets, in a form which is manifestly visible as individual wealth, helps reduce the political risks that many pension systems have suffered from. The Maintenance and Welfare of Parents and Senior Citizens Act passed in 2007 - Ensuring need based maintenance of parents and senior citizens, revocation of transfer of property by senior citizens in case of negligence by the relatives, penalties and legal implications for abandonment of senior citizens, establishment of old age homes, provision of medical facilities and availability of security for senior citizens and the protection of life and property. CFP Level 2 - Module 1 - Retirement Planning - India Page 127

7 different ministries under the government issued different provisions within their own policies to accommodate the provisions of this policy - The Ministry of Social Justice and Empowerment implemented a scheme to provide senior citizens with basic amenities like shelter, food, medical care and entertainment opportunities, the setup of old age homes, continuous care homes, mobile Medicare units, care centres for Alzheimer's and dementia patients etc. Ministry of Health and Family Welfare launched the national programme for health care of the elderly to provide dedicated health care facilities to the elderly people through state public health delivery systems The Ministry of Finance issued instructions to the insurance industry allowing entry into health insurance till 65 years of age and tax benefits to a senior citizen for taking up such schemes. It also gave a senior citizen higher rate of exemption on his tax limits, higher provision for medical insurance premium being paid under section 80D, standard deduction under section 80DDB for treatment of specified diseases and exemption from paying advance tax if there is no business income. The Ministry of Rural Development provides old age pension under the Indira Gandhi old age pension scheme of Rs. 200 per month to persons in the age group of 60 to 79 years and Rs. 500 per month to persons of 80 years and above and belonging to the below poverty line criteria as set by the Government of India. Ministry of Railways provides facilities like concessional basic fare for all classes on trains, no proof of age required and the ability to choose lower berth for senior citizens The Ministry of Home Affairs also has issued advisories to police personnel and staff to regularly visit senior citizens in the area checking on the safety & security, verification of domestic help and setting up of a toll free senior citizen helpline Under the Ministry of Civil Aviation’s instructions, Air India offers 50% discount for senior citizens on the highest economy class basic fare. Hence post implementation, citizen A could experience the following benefits –  People who are working in the organized sector and in government sector have National Pension System for getting regular pension during post retirement life.  Retirement benefit funds like CFP Level 2 - Module 1 - Retirement Planning - India Page 128

o Employees’ Provident fund o Employees’ pension scheme o Employees’ Deposit Linked Insurance Above benefits are given to an employee who is covered under Emplyee’s Provident Fund and Miscellaneous Act 1952. In provident fund employee and employer both contributes therefore employee gets very good corpus at retirement age.  Since a portion of the savings went into Employee pension scheme, some pension was ensured for Citizen A post retirement  Employee is given permission to withdraw from funds from his provident fund for important goals such as education of children, health expenses, housing requirements, children’s marriage etc.  In case an employee loss job or suffer disability, he can withdraw from his provident fund with waiting for any restriction.  Complete withdrawal from provident fund at least after 5 years, it will tax free.  People who are working in unorganized sector can open Public Provident Fund.  Citizen A once he has crossed the age of 60 years qualifies for lower slab rates of income tax, higher interest on normal and tax-free deposits, senior citizen’s savings schemes, exemption from payment of advance tax*, higher exemptions for payment of medical insurance, non- deduction of TDS*, concessions on rail and air travel, etc. The increase in life expectancy and the reduction in birth rates is taking India towards where most large developed economies stand today – a higher number of aged population. Project OASIS is a first comprehensive examination of policy questions connected with old age income security that endeavor to help the government take decisions today to deal with this problem of the future. The purpose of the project was to make concrete recommendations for the government of India today so that every youth can build his retirement Corpus throughout his working life and avoid being dependent or destitute when he gets to his old age. CFP Level 2 - Module 1 - Retirement Planning - India Page 129

The challenge was not to force Indians to save more in a provident fund or other such social welfare schemes – India already has a high employee contribution rate to the provident fund. The policy aimed at making this better, more efficient and accessible to the end user. Key policy recommendations as part of the project report were –  To limit early withdrawals on retirement funds  To ensure better financial and portfolio management of these corpus funds for superior returns  To ensure better customer service so as to be more accessible to the end user  To expand the coverage of the existing systems to reach more workers 2.6 Pension Scenario – State Governments, Autonomous Bodies and unorganized Sector A pension is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A pension may be a \"defined benefit plan\", where a fixed sum is paid regularly to a person, or a \"defined contribution plan\", under which a fixed sum is invested that then becomes available at retirement age The Government of India paid pension to all its employees under the CCS (Centralized Civil Services Pension Rules 1972) provided their joining date was before 1.1.2004 or their appointment was finalized before 1.1.2004 and joined service after that date. The employee has to complete 10 years of qualifying service for a pension. Those who joined on or after 1-1-2004 except defence personnel will come under the scheme National Pension System. They will not get inflation adjusted pension. These rules however do not apply to the employees under the Ministries of Railways and Defence – since they are governed by their own respective pension rules. Types of Retirement Benefit Plans Based on the discussion above, we can find that a person would have many financial needs that have to be met by the retirement benefit plan. All the needs can be taken care of if a corpus is built over the CFP Level 2 - Module 1 - Retirement Planning - India Page 130

working life of the person. Hence the benefit plans can be broadly classified into two types based on the way the quantum of money would accumulate at the end of the working life, which would then be used to provide the benefits sought. The amount that the benefit plan would provide on the date of retirement may be dependent on the amount of contribution made during the working life and its accumulated value or it may be dependent on the basis of a factor such as salary or the position occupied, number of years of working, etc at the time of retirement. Based on these the benefit plans would be classified into i) Defined Benefit Plans; ii) Defined Contribution Plans; and iii) Hybrid Plans (Combination of Defined Benefit and Defined Contributions Plans). Let us look at the salient features of these plans in detail: Defined Benefit (DB) Plans What are defined benefit plans? Defined benefit plan is a plan that specifies the benefits each employee receives at retirement or we can say that under a Defined Benefit Plan, employees are guaranteed a fixed benefit upon retirement. How do defined benefits plan work? A defined benefit plan guarantees you a certain benefit when you retire. How much you receive generally depends on factors such as your salary, age, and years of service with the company. Each year, pension actuaries calculate the future benefits that are projected to be paid from the plan, and ultimately determine what amount, if any, needs to be contributed to the plan to fund that projected benefit payout. Employers are normally the only contributors to the plan. But defined benefit plans can require that employees contribute to the plan, although it’s uncommon. You may have to work for a specific number of years before you have a permanent right to any retirement benefit under a plan. This is generally referred to as “vesting.”If you leave your job before you fully vest in an employer’s defined benefit plan, you won’t get full retirement benefits from the plan. How will retirement benefits be paid? Many defined benefit plans allow you to choose how you want your benefits to be paid. Payment options commonly offered include: CFP Level 2 - Module 1 - Retirement Planning - India Page 131

1. A single life annuity: You receive a fixed monthly benefit until you die; after you die, no further payments are made to your survivors. 2. A qualified joint and survivor annuity: You receive a fixed monthly benefit until you die; after you die, your surviving spouse will continue to receive benefits (in an amount equal to at least 50 percent of your benefit) until his or her death. 3. A lump-sum payment: You receive the entire value of your plan in a lump sum; no further payments will be made to you or your survivors. What are some advantages offered by defined benefit plans? Worker Advantages: 1. Workers can know in advance what their retirement benefits will be. 2. Employers, not workers, are responsible for providing retirement benefits, and the benefits are not dependent upon an employees’ ability to save. 3. Employees are not subject to investment risks due to fluctuations in the stock or bond markets. 4. A worker can earn a reasonable retirement benefit under a defined benefit plan, even if the worker has not been covered by a retirement plan earlier in their career. 5. A retired worker receives a guaranteed pension annuity, such as a monthly benefit, for life as does the workers surviving spouse, unless both the worker and spouse elect otherwise. 6. Death and disability insurance are typically provided under defined benefit plans. 7. Defined benefit plans can provide additional valuable benefits to workers, such as early retirement benefits, extra spousal benefits, disability benefits, benefits for past service, increased benefits, or cost-of-living adjustments. Employer Advantages: 1. By providing a predictable, guaranteed benefit at retirement that is valued by workers, a defined benefit plan can promote worker loyalty and help retain valuable workers. 2. An employer can provide a significant retirement benefit for workers, even older workers for whom no contributions have previously been made, or who did not or could not save for retirement earlier. CFP Level 2 - Module 1 - Retirement Planning - India Page 132

3. Defined benefit plans are flexible and can provide additional valuable benefits to workers. 4. An employer can design a defined benefit plan to accomplish organizational goals, such as offering enhanced early retirement benefits. 5. Defined benefit plan assets are collectively invested, which may result in higher investment returns. 6. While the employer bears the investment risks for the plan, favorable interest rates and economic conditions can reduce or eliminate an employers’ contribution, or make it possible to increase worker benefits at reduced or nominal costs. Note: 1. The better the investment performance the lower the contributions needed. 2. Benefit payable in futures is determined in the beginning. 3. Amount at retirement does not depend upon the amount set aside to fund the employer or the employee. Cost of the Defined Benefit Plan: 1. Contribution could vary time to time because of inflation and some other factors. 2. Regular review required. 3. Actuary would determined the liability and the investment required for the plan to generate sufficient funds. Disadvantages: 1. Not beneficial to employees who leave before retirement. 2. Difficult to understand by participant Defined Contribution Plans: Defined contribution plans (Also called a ‘Money Purchase Plan’) are retirement plans in which employees provide most or all of the funding (sometimes with a partial employer match and/or with discretionary profit- sharing contributions) by deferring a percentage of their salary. Once they retire, they have considerable flexibility in taking cash distributions. Defined contribution plans, are often thought of as 401K plans. This type of plan tends to be more beneficial to shorter tenure and/or CFP Level 2 - Module 1 - Retirement Planning - India Page 133

younger employees. Employees receive benefits based on salary, not tenure which may encourage employees to change jobs in order to receive access to lump- sum distribution from retirement accounts. Advantages: 1. Amount of contribution is known. 2. Participants can benefit from good investment results. 3. Easily understandable by participants. 4. Tax liability is deferred over the retirement age. Disadvantages: 1. Participants bear investment risk. 2. Difficult to build a fund for those who enter late in life. Difference between Defined Benefit Plan and Defined Contribution Plan Sr. No. Defined Benefit Plan Defined Contribution 1. 2. The quantum of the benefit on retirement The quantum of the benefit on retirement 3. of an employee is fixed either as an of an employee depends on the 4. absolute sum or as based on the length of accumulated value of the contribution service and salary drawn by the employee. made the employer or employee or both and hence is not fixed An Actuary has to be appointed to calculate the contribution and the quantum of Actuary is not appointed funding required The amount of contribution to be made by The contribution to be made by the the employer will depend upon the benefit employer is fixed either as an absolute sum payable, which is fixed and hence can vary or as a proportion of salary or wages tremendously. payable to the employee. The employer would not find this scheme to The employer would find these schemes his liability can vary from on valuation to rather easy to finance as he is quite aware the other putting a heavy strain on the of his liability and even at the time of pay CFP Level 2 - Module 1 - Retirement Planning - India Page 134

employer’s finance. revision or promotion of some employees the exact impact on the liability can be calculated accurately. The employee would prefer to have a The employee would not prefer this type 5. defined benefit scheme. of a scheme. Portability of Plans: 1. One of the effects of economic reforms is increase in private sector employment. 2. Now, employees switch jobs and are always on the lookout for greener pastures. 3. Hence, any plan that does not have the flexibility or portability is not advantageous for the employees. 4. Defined Benefit plan does not enjoy much portability. 5. The employee would like the benefits to be carried forward from one employer to another. 6. Only a DC plan offers easy portability – hence preference for the DC plans is on the increase. 7. Some recent trends are for more Defined Contribution retirement benefit plans. Hybrid (DB+DC) Plans: In addition to these two basic plans of “Defined Benefit” and “Defined Contribution”, there may be Hybrid Plans, though very rare, which are a combination of the benefits of both the above plans. In such plans, both the ends i.e. the rate or the amount of contribution and also the amount of future benefits to be made available to the beneficiary are fixed. Such plans are rare but do exist on account of social, political, economic or other compulsions. The statutory Employees Pension Scheme of the PF Authorities introduced in 1995 by the Central Government is an example of this “Hybrid Plan”. This pension scheme not only defines the contribution to be paid @8.33% and @1.16% of the salary of the employee covered under the scheme by the employer and the Central Government respectively but also defines the pre-determined benefits payable to the employee in the shape of pension after he qualifies for it. (The benefits of this scheme would be explained in detail in Chapter 5 of this module when the full scheme of statutory Provident Fund is discussed.) CFP Level 2 - Module 1 - Retirement Planning - India Page 135

Organized sector employees – Central government employees Two sets of schemes are applicable to Central government employees apart from those belonging to the Ministries of Defence and Railways- Appointed and joined before 1.1.2004 These employees are eligible to receive pension under the CCS 1972 rules. Employees under this segment can commute up to 40% of their pension amount. Minimum number of years of qualifying service has to be 10 years in order to qualify for pension. Commutation effectively means giving up part or all of the payment due as pension installments in exchange for an immediate lump sum payment. The remaining amount will be amortized into installments called monthly pensions. The formula for commutation is as below – Commuted Value of pension = 40% x Commutation factor x 12 Where, commutation factor will be as per the pensioner’s table and the reference age for the commutation factor that table will be the age on his next birthday Below is an example of the commutation factor table Age next Commutation value Age next Commutation value Age next Commutation Birthday expressed as Birthday Expressed as Birthday value expressed number of year's number Of year's as number of purchase purchase year's purchase 20 9.188 41 9.075 62 8.093 21 9.187 42 9.059 63 7.982 22 9.186 43 9.040 64 7.862 23 9.185 44 9.019 65 7.731 24 9.184 45 8.996 66 7.591 CFP Level 2 - Module 1 - Retirement Planning - India Page 136

25 9.183 46 8.971 67 7.431 26 9.182 47 8.943 68 7.262 27 9.180 48 8.913 69 7.083 28 9.178 49 8.881 70 6.897 29 9.176 50 8.846 71 6.703 30 9.173 51 8.808 72 6.502 31 9.169 52 8.768 73 6.296 32 9.164 53 8.724 74 6.085 33 9.159 54 8.678 75 5.872 34 9.152 55 8.627 76 5.657 35 9.145 56 8.572 77 5.443 36 9.136 57 8.512 78 5.229 37 9.126 58 8.446 79 5.018 38 9.116 59 8.371 80 4.812 39 9.103 60 8.287 81 4.611 40 9.090 61 8.194 Source: https://pensionersportal.gov.in/comm_table_6CPC.pdf In the event of the death of the family pensioner, the arrears of the pension is automatically payable to the eligible member of the family member next in line. Succession certificate can be provided to receive the arrears of the pension in case no eligible family member is available to receive the pension. List of eligible family members being: Spouse of the deceased retired employee Dependent son or daughter below 25 years of age Divorced or widowed daughter Page 137 CFP Level 2 - Module 1 - Retirement Planning - India

Besides the retirement pension paid by the central government, there are other types of pension also such as the Superannuation pension, Voluntary retirement for a government employee who has completed 20 years of service and wishes to retire early, family pension and extraordinary pension if the disablement/death of the employee has been attributed to government service. 2.7 Government – Decisive shifting away from Defined Benefit Schemes The Defined Contribution Pension System (National Pension System) All government employees who joined the Government Civil Services after 1.1.2004 became eligible for pension under The National Pension System instead of the Centralized Civil services regime. NPS is largely focused on one's retirement. While up to 60% of the maturity corpus can be withdrawn as a lump sum on maturity, the balance is compulsorily annuitized, i.e., balance is used to fund the annuity (pension) after retirement. This annuity is fully taxable in the year of receipt as income from other sources. 1. Portability – NPS does not have any Geographical restrictions. An account opened in any state of India can be accessed from all over the country. NPS corporate account is transferable between employers. 2. Flexible – NPS gives the subscriber the flexibility to choose the Fund Manager, Investment Option, Annuity Service Provider, etc. This gives you the control over your investments. 3. Economical – NPS is currently one of the cheapest investment products available. 4. Voluntary – NPS is voluntary product for citizens of India. Only for central and state Government employees, NPS is compulsorily under the fixed contribution scheme. Types and Tiers: NPS accounts are primarily of two types, Individual NPS account (All Citizen Model) and Corporate NPS account. In an Individual NPS account, the subscriber (Account holder) is the only contributor. All selections pertaining to Scheme preference, Investment choice, Annuity Service Provider, etc. Are done by the subscriber alone. Any citizen of India can voluntarily choose to open an Individual NPS account to avail tax benefits on investments and to ensure a fixed income post retirement. When a corporate chooses to offer NPS scheme to their employees as a retirement benefit plan, this is a Corporate NPS account. Any employee of a Company that is registered with a CRA for NPS can avail CFP Level 2 - Module 1 - Retirement Planning - India Page 138

Corporate NPS benefits. In such an account, the employee and the employer, both are contributing to the same NPS account. The employer makes a certain contribution to the employer's NPS account on his/her behalf. This employer contribution should not exceed 10% of the employee's Basic + DA. The employee too makes certain contribution to the same account. This ensures higher amount being contributed in the account and also gives better tax benefits to the employee. Subscribers have the option to open two types of NPS Accounts under the same Permanent Retirement Account Number (PRAN). These are called tiers in NPS:  Tier I: Contributions done to this account are eligible for additional tax deduction benefit of up to Rs. 50,000/- under section 80CCD (1B), over and above Rs.1,50,000/- u/s 80C. Withdrawals are restricted and subject to terms and conditions.  Tier II: Subscribers can invest an additional amount in Tier II NPS Account. Subscriber is free to withdraw his entire accrued corpus under Tier II at any point of time. In case subscriber has not contributed even the initial contribution towards Tier II a/c, it will be automatically deactivated as per process. No tax benefits are available in this account. Benefits: National Pension System (NPS) is a perfect solution for retirement planning. It provides old age income with reasonable market based returns. It is based on unique Permanent Retirement Account Number (PRAN) which is allotted to every subscriber for NPS. An NPS Account offers the following benefits:  Regulated: NPS is regulated by PFRDA (Pension fund regulator under Govt. of India)  Transparency: NPS account can be accessed online to make contributions and track investments.  Flexibility: The subscriber has the flexibility to choose the investment option, fund manager, Annuity Service Provider, Annuity Option.  Control: The subscriber has the control of his/her investments. This ensures that you can take calculated risks and ensure higher returns.  Long term returns: NPS is a long term investment plan. The minimum lock in period for NPS is 10 years. Hence the subscriber gets the benefit of compounding which ensures higher corpus on maturity.  Online presence: You can register and access your NPS accounts online making it very convenient to access and manage. Multiple features are made available online and also on the NPS application. CFP Level 2 - Module 1 - Retirement Planning - India Page 139

 Tax Benefits: NPS investments attract lucrative tax benefits. This ensures a yearly (immediate) saving. Following are the multiple tax benefits on NPS: Section Description 80 CCD(1) Individual Subscriber's contribution can clain tax benefit U/s 80 CCD(1) with in the overall ceiling of Rs. 1.5 lakh U/s 80 CCE 80 CCD(1B) Individual Subscriber's contribution upto Rs. 50,000 is eligible for tax exemption U/s 80 CCD(1B) 80 CCD(2) Corporate Contribution (Contribution made by the employer on behalf of the employee) made upto 10% of the employee's basic salary is eligible for tax exemption U/s 80 CCD(2) NPS Stakeholders: 1. NPS Trust The PFRDA (Pension Fund Regulatory and Development Authority) established the NPS Trust under the Indian Trusts Act 1882 and appointed a board of trustees wherein their responsibility is to take care of the funds of the NPS. The board of trustees have legal ownership over the trust’s funds. They have the following functions –  Execute the individual account holder’s pension account  Approving and monitoring audit reports, financial statements, compliance reports etc. which the intermediaries are required to submit to the Trust from time to time  Monitoring and evaluation of all operational activities and service level agreements as carried out by the various appointed intermediate agencies.  Protect and safeguard the interest of the subscribers of the NPS  Redressal of subscriber grievances and complaints CFP Level 2 - Module 1 - Retirement Planning - India Page 140

 Supervise the collection of any income due to the trust funds and claiming any repayments from tax. The NPS Trust is authorized by the PFRDA to carry out a monthly operational audit of the intermediaries such as the pension fund managers and also evaluate the performance of the appointed agencies every quarter. 2. Trustee Bank The NPS Trust holds an account with the trustee bank that is responsible for all NPS Trust fund related activities – deposits, withdrawals, pension disbursals. Currently the trustee bank is Axis Bank. The trustee bank is responsible for the day-to-day fund flow and other banking activities of the NPS Trust. It receives funds from all nodal offices and redirects them to the pension fund managers/annuity services providers. It also transfers funds to various entities during the settlement process and reconciles the balances daily with all CRA related accounts. The bank also provides periodic reports for the review and audit related activities of the trust. Retirement Advisers and Aggregators A Retirement Adviser (RA) is any person- an individual, partnership firm, body corporate, registered trust or society who desires to provide retirement advisory services on the National Pension System or any other such pension scheme regulated by the PFRDA. The NPS-Lite was introduced particularly to serve the interests of the Low Income Group subscribers who are economically disadvantaged and cannot bear heavy charges on their investment accounts An Aggregator is a link between the subscriber and the NPS-lite system – ensuring all communication flows seamlessly between the two entities. Aggregators function as part of a group servicing endeavor to reach out to and service these low income citizens. These aggregators function as the contact point for subscriber service requests, contributing collection and disbursal of withdrawals/pension amounts etc. CFP Level 2 - Module 1 - Retirement Planning - India Page 141

Several banks such Axis Bank, Allahabad Bank, Bank Of Maharashtra and other non-bank entities such as LIC housing finance limited, Jagran Microfin Pvt ltd etc. are examples of aggregators. Pension Fund Regulatory and Development Authority (PFRDA) is a pension regulator which was established by the Government of India on August 23, 2003. PFRDA is authorized by Ministry of Finance, Department of Financial Services. PFRDA promotes old age income security by establishing, developing and regulating pension funds and protects the interests of subscribers in schemes of pension funds and related matters. Central Recordkeeping Agency (CRA) as the sector regulator PFRDA has appointed Karvy Computershare & National Securities Depository Limited (NSDL) to offer NPS. Below are some of the functions of the CRA-  Registration of subscribers and issuance of the PRAN, dispatch of the PRAN card and welcome kit  Maintenance, updation, monitoring of subscriber records  Dispatch of statements of accounts to the subscribers and providing them with online access to their accounts  Processing of exit/withdrawal and other such service requests  Receipt and redressal of subscriber complaints The CRA operates via the CRA-FC (Facilitation centers) which are sub- entities appointed by the CRA who have branches in different parts of the country to provide services to the nodal offices. The CRAs are regulated by the PFRDA (Central Recordkeeping Agency) regulations 2015 and are subject to monthly evaluation and monitoring by the NPS trust for their functional and operational activities. Point Of Presence (POP) - The first point of interaction between the subscriber and the NPS architecture. POP shall facilitate the subscriber registration and submission of contributions. HDFC Bank Ltd. is registered with PFRDA as a Point of Presence (POP). CFP Level 2 - Module 1 - Retirement Planning - India Page 142

Pension Fund Manager (PFM) The contributions invested in NPS are managed by 8 Pension Fund Managers (PFM) appointed by PFRDA. The Subscriber can choose any one of the below given entities:  HDFC Pension Management Company Limited  UTI Retirement Solutions Limited  Kotak Mahindra Pension Fund Limited  LIC Pension Fund Ltd  SBI Pension Funds Private Limited  ICICI Prudential Pension Funds Management Company Limited  Birla Sunlife Pension Management Limited One can change one’s PFM once in a financial year Of the above, SBI, LIC & UTI are the only fund managers that manage the contributions of the government employees under the NPS Annuity Service Providers After completion of 60 years of age, the subscriber will have options to start Annuity. Below are Life Insurance Companies registered with PFRDA that offer Annuity:  HDFC Standard Life Insurance Company Limited  Star Union Dai-Chi Life Insurance Company Limited  Life Insurance Corporation of India Limited  ICICI Prudential Life Insurance Company Limited  SBI Life Insurance Company Limited Charges: Intermediary Charge Head Service Charges* Initial Subscriber Rs. 200/- Charges by Bank - Point Of Registration Presence - POP (Maximum Permissible Charge for each Initial Contribution 0.25% of the initial contribution Subscription) amount from subscriber subject to a Any subsequent minimum of Rs.20/- and a maximum CFP Level 2 - Module 1 - Retirement Planning - India Page 143

Contribution of Rs.25,000/- All Non-Financial Rs.20/- Transactions e-NPS (for subsequent 0.10% of the contribution. Min. Rs. 10/- & Max. Rs. 10,000/- (Only for contributions) NPS- All Citizen & Tier- II accounts) Charges by Bank - Point Of Rs. 50/- per annum (Only for NPS- All Presence - POP (Through Persistency Citizen Model) cancellation of Units) Permanent Retirement Account Number (PRAN) Rs.40/- M/s NSDL e-Governance Opening Charges Infrastructure Ltd (1st CRA) PRAN Annual Rs. 95/- Maintenance Charges Charge per transaction Rs. 3.75/- PRA Opening Charges Rs. 39.36/- M/s Karvy Computershare Pvt Ltd Annual PRAN (2nd CRA) Maintenance cost per Rs. 57.63/- account Charge per transaction Rs. 3.36/- Fund Management Charges (FMC) 0.01% p.a. of total accumulated amount Note : *The charges are subject to revision by Regulators. *Taxes as applicable. Investment Option: Subscribers have the option to select allocation pattern for their investment across various asset classes. Active Choice: This option allows the subscriber the freedom to design the portfolio among 4 asset classes as below: CFP Level 2 - Module 1 - Retirement Planning - India Page 144