Although many of us ignore the need for retirement planning, it is hard to overstate its importance in enabling you to lead a life of dignity in your sunset years. The potentially catastrophic combination of no income, rising inflation, and mounting living expenses (including medical expenses) can be too much to bear even for those with a modest lifestyle. This explains the existence of multiple retirement schemes offered by the Government of India as well as the private sector to help you secure your sunset years.
Arguably the most well-known of these is the National Pension System (NPS), launched by the Government of India in 2004 for government employees and opened to the public in 2009. As per the scheme, subscribers are expected to contribute regularly to a pension account during their working years. Once you reach the age of 60, you can withdraw a part of the amount (60%) while being required to invest the rest of the corpus in a PFRDA-approved annuity plan.
Despite some limitations, NPS is a popular instrument known for its affordability and superior returns. But there are other investment options in the market like fractional ownership which can provide better returns with flexibility, which are equally suitable for retirement planning.
Fractional ownership is a relatively new concept in India which allows you to invest in commercial properties like office spaces and malls. One of the lesser-known facts about the real estate market in the country is that the commercial segment was undergoing a sustained boom for several years prior to the pandemic. Currently, it is on a recovery path with a strong outlook powered by underlying strengths in India’s office space market as well as the economy.
In previous years, the high cost of commercial property, often running into several hundred crores of rupees, prevented the middle class investors from reaping the benefits of high returns. But the fractional ownership model opens up this space by enabling them to invest in a portion of the property, at a much smaller ticket size.
Although fractional ownership is not regarded as a traditional option for retirement planning, it can be useful in providing good returns and flexibility. A head-to-head comparison between NPS and fractional ownership suggests why the latter option may be more prudent.
When it comes to investments, liquidity is an important factor. As NPS is a typical retirement instrument, the investment is locked in till you reach the age of 60. Those in need of funds for any reason before maturity can withdraw a maximum of 25% of their corpus. Fractional ownership is more flexible in this regard with no lock-in period and withdrawal limit.
The fractional ownership model offers more stability when compared to NPS. Investments in Grade A commercial properties, marked by high-quality tenants, long lease periods (usually seven years) and airtight contracts, tend to provide stable returns over extended horizons. By contrast, a certain percentage of an NPS investment is dependent on the performance of the equity market.
NPS has a track record of delivering good returns in the 9-12% range. In comparison, the average rental yield for commercial property is 9%. What’s more, commercial properties undergo capital appreciation in the range of 7-16% annually, depending on factors like location. This dual benefit of rental income and steady capital appreciation outweighs the returns on NPS.
NPS offers significant tax benefits in terms of investment, income and maturity, though the income from annuity plans is taxed. Although the income from fractional ownership does not enjoy tax advantages of any sort, they still compare favorably to NPS. The combination of rental income and capital appreciation tends to outweigh the tax benefits on NPS, making fractional ownership a better choice.
Despite not being counted among traditional retirement planning options, fractional ownership can provide a healthy social security cover to protect you in old age. The recent history of commercial property investment in India shows that it brings relatively high and stable returns. It can be a wise decision to include it in your retirement portfolio along with other instruments.
(By Shiv Parekh, founder of hBits)
Disclaimer: These are the personal views of the author. Readers are advised to consult their financial planner before making any investment.