Good news seems to be raining for senior citizens. The Union Budget has proposed to initiate a scheme for senior citizens that would bid an annual return of 8 per cent for a span of 10 years. The Life Insurance Corporation of India (LIC), on April 1, 2017, has launched the scheme offering interest pay outs on an annual, half-yearly, quarterly and monthly basis.
Previously, in December 2016, special senior citizens fixed deposit was announced by India's honourable Prime Minister, Narendra Modi, that offered a certain return of 8 per cent and featured a policy term of 10 years. The maximum investment limit of the FD was 7.5 Lakhs. Now here’s the Big Question! How would you compare these schemes with several other investment choices available in the market for senior citizens?
Earlier, in 2014-15, a similar pension plan was also offered for senior citizens by the Life Corporation of India (LIC). The scheme was offering an annualised return of approximately 9 per cent. The new scheme is also expected to remain open for subscription for a year from the day it is launched.
As per Suresh Sadagopan, the founder of Ladder7 Financial Advisories, despite the fact that 8 per cent interest seems attractive at this particular time, for citizens who fall in the higher tax brackets, the effectual produce will be lesser than 8 per cent.
“Tax is levied on the annuity in the hands of the one who invests. Keep this in mind and put in only a part of your portfolio in any such scheme,” he explains.
There is one more thing that you need to keep in mind is that usually, the interest rate on such schemes of annuity is higher for the elderly citizens. So, anyone who has attained an age of 70 years will get a higher rate of interest as compared to the one who has attained an age of 60 years. Despite that, existing LIC senior citizen pension schemes current rates of annuity, 8 per cent, seems attractive.
For example, in the case of the annuity plan of Life Insurance Corporation (LIC) VI, the interest rate for those aged 60 years is approximately 7 per cent. The rates on this scheme in December 2016 were reduced by LIC, after the fall in the rates of interest.
According to renowned insurance expert, Mr. P. Venugopal, when comparing of the returns earned in the short-term, this annuity plan presents smaller produce than a normal Fixed Deposit of the bank for senior citizens. However, the rates of the bank FDs keep on changing while the rates of the annuity are fixed. Thus, in the long run, the rates of annuity may be considered about being any certainty or the earned rate of interest. But if you look at the short-term investments or if you are at ease with a little instability, then bank fixed deposits or even mutual funds with fixed income are the better choices than that of an annuity plan. You can even National Pension Scheme into consideration that gives you better yields with litheness to take out your money anytime.
NCDs can also be considered by the senior citizens that could give probably higher returns. But you must keep the safety aspect in mind as private players issue the NCDs, unlike the pension scheme that the Life Insurance Corporation will issue and thus is very safe, says Sadagopan.
Post Office Senior Citizens Scheme that offers 8.5 per cent for five years and National Savings Certificate (NSC) that gives 8 per cent for five years are other options offering liquidity. However, the rate of interest is subject to change.
Should You Invest?
The details for Varishtha Pension Bima Yojana (VPBY) 2017 have not yet been announced. Experts are in anticipation of the details for VPBY 2017. On the other hand, given the rate of interest and tenure, you can make a few comparisons with various similar schemes rolling around in the market.
There are various other options like small savings schemes that offer a little higher rate of return than the bank fixed deposits and are admired by the senior citizens.
An interest rate of 8.5 per cent is currently offered by the Senior Citizens Savings Scheme (SCSS), but the return on SCSS is connected to the government securities yield of similar maturity and is contingent on revision each quarter and encompass a maturity of five years. If you wish to reinvest after the term gets over, then you will have to make the reinvestment at the existing rates of the market.
Then there is Government of India Savings Bonds that offers 8 per cent rate of interest. Anyone can invest in these bonds without any age limit and cap on investment. The tenure of these bonds is six years and investors are free to choose to take an interest either on a commutative basis or on a half-yearly basis at the end of the tenure.
However, the experts believe that VBPY 2017 will be a better choice as rates of interest are on a trajectory inclined downwards and are expected to be continued so at least in the future. An interest rate of 7 per cent is offered by the banks on fixed deposits of 10 years to the senior citizens.
The CEO of Outlook Asia Capital, Mr. Manoj Nagpal said, “This will be a better choice with the rates of interest going down. In the view of the fact that the scheme will be open for a year from the day when the scheme will be launched, it will be suggested that you wait and see all through the year whether the Reserve Bank of India will cut the rates further or not and then make decision of investing if the rates of interest go down further.”
Mr. Anil Rego, the CEO and Founder of Right Horizons said, “If you consider the rate of interest are declining it might not be an awful idea for the senior citizens especially, the one who falls in the lower tax bracket. However, as the income from interest will be taxable, the ones who fall in the higher tax bracket can also seek for such options like bonds on which taxes are not levied.”
After the considerably long phase of government initiated demonetisation, banks are gashing the rate of interest on fixed deposits. Hence, to protect the interest of the elderly citizens, i.e. the ones’ who have attained an age of 60 and above, in case the rates of interest fall flat, the Prime Minister of the country, Mr. Narendra Modi made an announcement about this scheme promising an assured interest of 8 per cent for a tenure of 10 years.
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