Most people in their 30s are usually not thinking about saving for retirement. Rather than focusing long term, most people have immediate issues to cater to, like starting a family, buying a house or purchasing a car. For millennials, it also includes vacationing, lifestyle choices, and socialising.
However, retirement planning today can yield for you, multiple benefits. Think of it this way: If you had invested PKR 10,000 ten years ago in a liquidity/money market mutual fund (say from your first salary), your expected return on investment could be PKR 9,500 over and above your amount (UBL Liquidity Fund Plus). This means you would be earning about 8.39% per annum. Liquidity or money market funds are relatively low-risk investment avenues. Which means you can invest in the fund with relatively low risk and an almost steady stream of income.
Now imagine the return you could have earned if you were proactive and invested a certain amount every month. If you proactively invested across different avenues such as equity, money market and fixed income, you would have been well on your way to collect a decent nest egg while having a diversified portfolio that earns you passive income!
While the local market has several different options available for investment, there are specific products created particularly with retirement in mind. Keep on reading below to learn more:
Exploring Investment Opportunities:
Most of us have grown up listening to our parents talk about a few conventional investment or savings avenues. The truth is that the avenues we have heard our parents speak about are probably not the greatest ones for planning for retirement. They may give stable returns, but to build a nest egg that pays for your retirement. Your funds need to be invested in a different asset class altogether.
- National Investment Schemes: There are numerous national investment schemes that you can evaluate for retirement investment. For example, special savings certificates, defence saving certificates and other national certificates (Behbood, Short Term, and others). These are guaranteed low risk and guaranteed payout schemes that you can invest in. However, since they are low risk, the payout for these schemes also remains low. Which means that while you may earn a steady, low-risk income, you are not earning enough to build a steady retirement fund for yourself. You do not receive any tax benefits either on the earnings either.
- Savings Account: Every bank offers a savings account option where they give you a certain rate of return if you keep your funds in it. Standard Chartered Offers 3.75% annually on their easy saver account, Silk Bank offers 4% annually and Bank Alfalah offers 3.75% annually on their PLS Savings account. You can check your own bank for more information on their returns as well. The problem with investing in savings accounts is that the return is much less than the inflation rate in the market at this point. Which means you’re actually losing the value of this money in the long run!
- Mutual Funds: There are several options available for you when you want to maintain your money in a mutual fund. If you sign up with any mutual fund, you can also consult with a financial advisor for that fund, who can guide you about risks and returns available with different types of funds. You can also check out the rates of return Click here to see returns. Mutual funds help you invest in various asset classes through the pooling of money from various investors such as yourself. Through mutual funds, you can invest in equities (i.e. stocks), bonds, treasury bills or some combination of these asset classes. The fund is managed by a professional fund manager (i.e. asset manager), for a small fee. By investing in mutual funds you free yourself from all the work required to be a successful investor (i.e. research, constant monitoring, etc.). Though mutual funds are great investment avenues, they aren’t meant for retirement planning. There are specific products that help you save for retirement.
Read below to find out the key products designed specifically with retirement in mind. These voluntary pension schemes (VPS) are designed to invest your funds, earn good rates of return, and then designed to give you a steady stream of income at the time of your retirement. These pension schemes can help you actively plan for your retirement age and provide monthly income for you to use.
Voluntary Pension Funds:
With VPS you can decide your own investment/savings plans through choosing an appropriate allocation (the amount of money you allocate towards each asset class i.e. equity, bonds, money market, or commodity) to fit your risk appetite or alternatively choose from pre-defined/default allocations. You would need to sit with your advisor to discuss your risk appetite, investment frequency/amount and your potential. There are different types of pension funds available in the market and the quickest way to evaluate them would be to discuss these with the top fund advisors such as UBL Fund Managers, Al-Ameen Funds, Al-Meezan Investment Management. You could also check out the rates of return and other details of these funds here.
There are various alternatives available in the market for you to choose from. Leading asset managers offer an Open-End Islamic Voluntary Pension Schemes that you can start investing in with as low as PKR 1,000. For their services fund managers will generally charge a management fee of 1.5% and entry load of 3%.
UBL Fund Manager offers two types of retirement schemes, conventional and Islamic. You can start saving towards your retirement in Al-Ameen Islamic retirement Savings Fund with as low as PKR 500. UBL retirement savings fund has more or less the same requirements.
HBL Asset Management Ltd also offers similar investment opportunities as UBL with a minimum investment of PKR 500 required for both their Conventional and Islamic Pension Schemes. Similarly, MCB offers Pakistan Pension Fund and Pakistan Islamic Pension Fund as a part of the voluntary retirement plans.
Why invest in VPS?
All of these Voluntary pension schemes have the following benefits of investment:
- You can withdraw up to 50% of lump sum cash, which is tax-free at the time of your retirement. The other 50% is taxed at a rate equal to your average rate of tax in the last three consecutive years if you choose to withdraw the remaining 50% at retirement. Or alternatively, you could reinvest the remaining or your full amount into an “Income Payment plan” and receive monthly income even after retirement (this is highly advisable).
- You can also choose when to retire – anytime between 60-70 years of age
- Even when you switch your jobs, your pension fund does not seize.
- You could choose to invest lump sums or even contribute frequently to your VPS. The best thing is there is no compulsion and you could even miss a payment and not be penalised for it. However, we would not advise you to miss any payments, simply because this it is a matter of your future financial health. Having said this it is comforting to know that the retirement fund and it’
- Investing in a VPS can provide tax relief and benefits that are usually not associated with any other investment/savings tools:
- Any investment returns are tax-free until you retire
- You receive a reduced tax rate on your income after retirement (pensions)
- You can get tax credits when you invest in Mutual Funds or Voluntary Pension Schemes. Tax credit up to up to 50% Taxable Income can be availed if you invest in a VPS.
Why Investing During Your 30’s so Important?
Assuming you just turned 30, and are thinking whether it is time to put aside some money in a retirement fund or not. You can see the impact your contributions towards a retirement fund can have in the illustration below. Assuming you contribute PKR 10,000 a month across three asset classes (i.e. equity, bonds, and money market) in equal proportion i.e. PKR 3,333. From the table below you can see how a small sacrifice today can attribute to a substantial benefit tomorrow.
As mentioned earlier, once you have hit your retirement age, you can withdraw 50% of your fund at 0% tax, and transfer the remaining 50% to an income draw down plan that will pay out monthly for the next ten years or longer.
For a stable and healthy financial life, it is important to start planning for your future and taking a frugal approach. You don’t have to be a miser, but you can be wiser than you have been. It still isn’t too late, get in touch with an asset manager to learn more about your options.
Disclaimer: This article is for informational and awareness purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory. No reference to any specific security constitutes a recommendation to buy, sell or hold that security or any other security. Nothing in this article shall be considered a solicitation or offer to buy or sell. Readers, subscribers, users are encouraged to get in touch with investment advisors for professional advice.