Best Retirement Pension Planning through Systematic Withdrawal Plan(SWP)

Best Retirement Pension Planning through Systematic Withdrawal Plan(SWP)

Roboadviso     Financial Planning,Mutual Funds     Posted On, Sun 18th June, 2017     No comments

best retirement pension plan systematic withdrawal plan

Conventional investment options like fixed deposits are witnessing a dip in the interest rates. It makes sense to look out for investment avenues that tide over inflation.  Hence, many retired people are opting for SWP or Systematic Withdrawal Plan in Mutual Funds schemes to boost their income.

What is Systematic Withdrawal Plan?

Systematic Withdrawal Plan is a mutual fund scheme facility which allows investors to take out or withdraw a fixed sum of capital growth. The withdrawal frequency can be quarterly or monthly. The cash inflow can also be customized by investors; they may withdraw only the capital gains or a fixed sum.

For example: If you invest 10 lakhs in an SWP mutual fund scheme with a 9 percent per annum return and have a fixed sum withdrawal of INR 10000 every month, then the funds will continue to give you income for over 15 years (i.e., 182 months).

If the expected yearly rate of return for the fund is more than the annual cash withdrawal, then the fund may last perpetually. Thus, if only 7 to 8 percent of the corpus is withdrawn and the return rate is 9 percent, then the one time mutual fund investment can be used for perpetuity.

SWP involves redemption of units from mutual fund investment. Hence, each withdrawal from the scheme will be taxed the same as debt and equity funds. Debt funds with holding period of less than 3 years will require payment of short-term capital gains, while longer holding periods invite long-term capital gains tax. Equity-related funds with less than 12 months holding period will require payment of short-term capital gains.

SWP is more reliable as compared to the dividend option. It also provides the benefit of a fixed sum withdrawal by the investor on a fixed date every month, or every quarter, for a set tenure. It is thus a better option of regular income than dividends of mutual funds. In equity-related mutual funds that offer dividends, investors are not guaranteed about the amount of dividend that they may get as it is dependent on movements in the market.

An SWP can be started at any time after investment in a mutual fund scheme. Investors need to fill up a form with the asset management company to activate SWP. The form requires information such as the folio number, first withdrawal date, frequency of fixed sum withdrawal, and the bank account where the amount needs to be credited.

Why opt for Systematic Withdrawal Plan?

There are many advantages of investing in SWP mutual fund schemes.

Since dividends from funds are not guaranteed, retired people should not completely depend on dividends for regular income to meet the expenses. SEBI has also mandated that dividends cannot be distributed to investors from the capital of the mutual fund schemes. The dividends can also be disbursed from the realized gains or profits. This is one of the major reasons why many investment experts think that the SWP option is better than dividend option for people who are retired and are looking for a definite pension amount at regular intervals.

The SWP plan also has a few peeving issues. There is a worry that the SWP strategy may result in loss of the entire capital. If the amount that is withdrawn is far more than the returns on the investment, then the fund will eventually get exhausted.

It is however easy to overcome the above problem. But it is important to note that each investor needs to work with the advisor to come up with distinct solutions. The entire corpus needs to be invested in such a manner that its earnings are higher than the withdrawals or consumption.

  • A good plan is to split the corpus between equity and debt in a ratio of 25:75. This mix is expected to deliver per annum return of 8% – 10% over a period of next 5 years. The ideal rate of withdrawal per year for purposes of consumption from this plan is anything upto 8%.  A higher withdrawal rate may not be detrimental in some cases. 

Experts in investment and finance think that SWP comes with only one main disadvantage and it is the fact that SWP mutual fund investment has the risk of capital erosion in short ter,  which may prevent the corpus from accumulating and becoming bigger over a period of many years. But the probability of this happening is very negligible if the allocation to Equity is not more than 25%.

It is vital for investors to carefully select their investments. One also needs to check for taxes on withdrawal. Make the numbers as real as possible to prevent erosion of capital. Individuals who are still unsure of SWP should research more and seek advice from experts. It is possible to easily manage the redemption or withdrawals according to the fund returns to make sure that your capital remains safe and growing.

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