WHAT YOU SEE AND WHAT YOU GET
The new senior citizens’ pension plan cuts out the uncertainty of changing interest rates
At a time when fixed deposits offer just 6-7 per cent interest, the government has announced a new annuity scheme—the Varishtha Pension Bima Yojana (VPBY). Offering a fixed return of 8 per cent, it protects senior citizens from fluctuating interest rates. The question is, should you lock your money for 10 years in the scheme?
A single premium pension plan for senior citizens aged 60 and above, it gives an annual return of 8 per cent over 10 years. You pay a single premium of around Rs 7.5 lakh for a pension of around Rs 5,000 a month. The Life Insurance Corporation of India (LIC) scheme is expected to be launched by the beginning of the next financial year (2017-2018). The policy name does contain the word ‘Bima’, but to clarify, there is no insurance cover. On the minus side, insurance experts say being an annuity, the scheme should be continued for a lifetime and not just 10 years. As of now, there is uncertainty on what the rate will be after 10 years.
Earlier variants
In its first incarnation, launched in 2003, the VPBY carried an interest rate of 9 per cent when a 10-year bond yield was at 5.61 per cent. The scheme was revived in 2014, offering an interest rate of 9 per cent. During the period, a 10-year bond yield was at 8.55 per cent, but interest rates were on a downward trajectory. Earlier versions of VPBY gave the option of receiving pension monthly, quarterly, half-yearly or annually. The maximum and minimum amounts that could be invested were decided according to the duration of payment. The same is expected to continue for the latest version of VPBY. Other schemes on the same lines include the senior citizen savings scheme, which offers a high 8.5 per cent interest but matures after five years (the rate is subject to revision every quarter). The Government of India savings bonds offer an interest rate of 8 per cent and have a tenure of six years. There is no age limit for such bonds.
What should you do?
A change in the RBI stand, from accommodative to neutral, has led to uncertainty in the interest rate market. The scheme is a good option, considering this uncertainty around interest rates. The scheme has an investment limit of Rs 7.5 lakh, which is to forestall the temptation to park all your retirement savings in this scheme. One can combine it with the senior citizen savings scheme and the monthly income plans mutual funds offer to get a regular income.