Post-retirement nest eggs for those who value safety, regularity

Post-retirement life in India typically begins at the age of 60. People don’t have a uniform risk appetite. There are people who are risk-averse just as there are people who don’t mind chancing their arm to get a little more than what the risk-averse can get and don’t mind being singed i.e., taking losses arising out of their bravado in their strides.

For the second category, share market investments either direct or through the safety of mutual funds can be the gravitas. In this article, we are concerned with the first category alone – to whom safety of investment and regularity of returns matter above anything else.

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

The scheme is a fixed maturity plan – 10 years. Investment is one-time upfront which is capped at ₹15 lakh in sync with the post office senior citizen scheme. The minimum is the amount that would beget at least ₹1,000 per month as pension. Meant only for those who have attained the age of 60 once again with the post office senior citizen scheme. It is open only till 31 March 2023. So, one has to rush if she is already 60 but if she is not likely to attain the hallowed status of senior citizen by 31st March 2023, the scheme would pass her by though it is entirely possible that scheme may be extended.

One can opt for monthly or quarterly or half-yearly or annual pension. On death as well as survival till maturity, the principal amount would be refunded. When one considers the fact that the rate of interest is 7.40% per annum as well as the factum of upfront one-time investment, the scheme is clearly a fixed deposit scheme and hence reference to pension may appear to be inappropriate.

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The scheme allows premature exit during the policy term under exceptional circumstances like the pensioner requiring money for the treatment of any critical/terminal illness of self or spouse. The Surrender Value payable in such cases shall be 98% of the Purchase Price. Loan too is available after the third anniversary of the policy of a maximum of 75% of the purchase price carrying the prescribed rate of interest obviously a couple of notches above the pension rate.

Post office SCSS

This is by far the scheme that enjoys maximum recall for being guaranteed by the government of India. That from October 2022, the interest rate has been stepped upto 7.60% from the corona-truncated 7.40% has warmed the cockles of the elders. On the flip side, it matures after five years though it can be extended by another three years.

In this respect, PMVVY scores over the Senior Citizen Savings Scheme (SCSS) as one gets to invest and forget for 10 years instead of having to bestir and complete the renewal formalities so soon in the day. But it affords no latitude for premature withdrawal for exigencies including emergency medical purposes and extracts a stiff price for premature exit – forfeiture of first year interest in case the account is closed before one year, forfeiture of 1.5% of the deposit if closed during the second year and of 1% of the deposit if exited during the 3rd or 4th or the 5th year.

The lock-in period during the extended run of three years is just one year. The amount deposited in SCSS is eligible for deduction under section 80C of the income tax Act but the interest is taxable.

National Pension System (NPS)

Unlike SCSS and PMVVY, the entry point under NPS is not the mellow age of 60. In that sense, it is a true nest egg scheme in that you start building your corpus for post-retiral life much early in the day.

Originally conceived as a sensible alternative to defined benefit plan obtaining for government employees thanks to which those who joined government service prior to 2004 enjoy generous pension often several times more than their last pay (joint secretary in GOI who got ₹8,000 in 1990 as his last pay draws a pension of a mind-boggling and mouthwatering ₹1.50 lakh today), the NPS is a defined contribution plan under which one has to make a monthly contribution to his pension corpus or nest egg so as to get a tidy sum after retirement 40% of which has to be in the minimum converted into annuity. The scheme was extended to anyone interested in 2009.

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But in April 2021, the pension regulator Pension Fund Regulatory and Development Authority (PFRDA) stopped making a fetish of mandatory conversion of minimum 40% corpus into pension and allowed full withdrawal so long as the corpus was upto ₹5 lakh and allowing systematic withdrawal for amount in excess of ₹5 lakh.

This was an open admission of pension fund managers’ proving woefully inadequate to the task of operating funds for the benefit of senior citizens. The brief period of pension fund managers outdoing the statutorily mandated interest of 8% to 9% by the Employees’ Provident Fund Organisation (EPFO) proved to be evanescent if not illusory.

ICICI Prudential Guaranteed Pension Plan Flexi (ICICI for short)

In deference to the fact that man by nature does not like to cast himself in a mould and instead wants a refreshingly unique scheme that is the antithesis of one-size-fits-all, the ICICI scheme offers flexibility of regular savings for a lifelong guaranteed income, flexibility to choose how long you want to pay premiums, flexibility to choose when to start your annuity/income and flexibility to receive annuity on a monthly, quarterly, half-yearly or yearly basis. It offers a decent yield of 7.59% per annum positioning itself as a challenger to SCSS of post office offering 7.60% per annum but then both the LIC and post office are fortunate to enjoy sovereign guarantees being government owned.

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In conclusion, it can be said without the fear of contradiction that in India, one has to fend for himself in the autumn of his life unless he was fortunate to have joined government service before 2004 and enjoy pension that dares to compete with salary of middle-level employees of the private sector.

SCSS and PMVVY cap of ₹15 lakh is too conservative. In the US, citizens have the choice of reverse mortgaging their properties in return for annuities or one-time payment without having to service the loan during their lifetimes with such obligation quietly passed on to the recalcitrant and incorrigible children.

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In India, reverse mortgage has not taken off in a big way thanks to the mushy sentimentality of parents who cannot hurt their children even posthumously. In the event, SCSS enjoys instant recall among elders despite the niggardly cap of ₹15 lakh and an extremely short period of eight years to bask under.

(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws.)