By Shri Supratim
Bandyopadhyay, Chairman, PFRDA
particularly when it is about one's future, is important. However, globally
knowledge about financial planning among people is very low as shown by OECD/INFE
2020 International Survey of Adult Financial Literacy. India is no exception. The primary reason for this
situation is the lack of understanding of financial concepts and absence of
financially prudent behaviors and attitudes amongst the people. Financial
literacy is therefore, very important for robust financial planning.
quality of health and lifestyle has meant that people will live longer after
retirement and paradoxically, neither their employer nor the government can
offer an attractive retirement income that fulfils all their aspirations until
the end of their lifespan. Moreover, governments and employers worldwide are
increasingly replacing their guaranteed pensions (defined benefits) with
defined contributory pensions wherein employees choose their investments and
bear the burden of investment risks. As contributory pensions are primarily
funded by employees and partly by employer, it is left to the individuals or
employees themselves to create the financial support they would require in
their old age.
To lead a dignified retired life, it is prudent to plan one’s retirement that enables periodic income in the form of annuity or pension.
The cultural mindset
of Indians is traditionally somewhat different from that of many other
nation’s, notably, prevalence of joint family system, planning bequest for
children and investment preferences. Moreover, mandatory government financial
support at old age or income security after attainment of specified old age is
much less unlike developed countries. There is a change in the air of course,
with joint family systems giving over to nuclear families and preferences
for stocks, bonds, and mutual funds etc. (financial assets) instead of the
traditional gold, real estate etc. (physical assets) are increasing amongst
Indians. It is now, all the more crucial that Indians have an extended
financial plan to meet their future income needs.
To lead a dignified
retired life, it is prudent to plan one’s retirement that enables periodic
income in the form of annuity or pension. The cost of living is rising
constantly. Moreover, as people age, medical problems increase and medical
inflation is much higher than overall inflation. To meet these expenses, robust
retirement planning is required.
is an important part of financial planning as it not only ensures an additional
source of income but also helps in dealing with medical emergencies, fulfill
life aspirations, be financially independent and live life with dignity.
It also places less burden
on the public exchequer. With countries responding to tackle ageing population
crisis through adoption of private pension savings, it is often opined that
funded pensions contribute to economic growth by infusing money into capital
markets. This creates opportunities to release more funds for long term
investment & infrastructure building.
More pension savings
create deeper capital markets, which is beneficial to entities whose growth
hinges on external finance. Theoretically, if individuals have more purchasing
power with their investment towards the retirement corpus and pension,
they can spend and fulfill their desires and needs, which will create demand
and ultimately boost GDP and the overall economy.
NPS enables a person to create a pension corpus of his/her choice which will meet all financial requirements post superannuation.
Arguably, one of the noteworthy schemes available
in India is National Pension System (NPS) which was introduced mandatorily for
central government employees with effect from 1st Jan 2004 and can
be subscribed on a voluntary basis by any Indian citizen aged between 18-65
years. The age limit for entry to the scheme is being raised to 70 years very
soon. NPS is a must have retirement planning scheme in the portfolio of a
person which can also be subscribed along with other pension schemes like
Superannuation Fund/Provident Fund. NPS is comparatively the most
cost-effective pension scheme with attractive rate of returns, exclusive tax
breaks and lots of flexibility. Thus, it enables a person to create a
pension corpus of his/her choice which will meet all financial requirements
At a time of crisis
unfolding due to COVID-19 pandemic, which is likely to put considerable
economic and financial pressures on individuals and test their ability to
preserve their financial well-being, it's an utmost need for us to
increase financial literacy which will lead to financial resilience and enable
our citizens to deal effectively with their financial requirements.