Decoding Returns from Superannuation Schemes

Since we do valuation and diligence work day-in and day-out, our life is often driven by Excel spreadsheets 

Excel spreadsheets, when carefully prepared and scrutinised, often tell untold stories 

When I was in job, opting for the Superannuation Fund seemed to be too enticing – 30% tax saved gives you a surge of dopamine –

However, it took me a while to understand how clumsy these schemes can be and eventually become an albatross around your head

Now I get Rs 3052 per quarter against the Rs 240,299 that has got stuck in purchasing an annuity.

After my death, the successor will get this 240,299/- and I don’t know after how many bureaucratic hassles, as there is no online access/transaction option

I prepared an Excel calculator to arrive at my IRR returns ( attached)

The flow is

a) Employer makes contributions to the scheme per quarter – and since that salary would have been otherwise taxable, have taken tax shield as an inflow

b) 1/3rd gets commuted tax free when you exit the company and 2/3rd gets converted to an annuity – with quarterly tax free interest

c) On your death, your nominee gets this 2/3rd

I have plotted 3 scenarios using XIRR – 11.72%, 9.81% and 9.22% for death after 10, 20 and 30 years 🙂

(Maybe not worth the hassle)

And imagine, w/o the tax shield its a 5.2% IRR product – so much to make a behemoth like LIC stay alive with these inefficient schemes

Do evaluate the projected IRRs for schemes in which you are participating

#finance #investing #superannuation #retirement