What are some investment options to get an assured pension later in life?

Priyank
Jul 9, 2019
I want assured pension after retirement. I don't want to take high risk.
2 Answers
Jul 9, 2019

Priyank, you are clear that you want a pension.  Let us look at the confusing usage of the term pension plan in India.  Below is an excerpt from my blog article.

There is a level of ambiguity in the usage of word ‘pension plan’ in India. Most of the schemes that have the word pension in them are in fact ‘accumulation plans’. The ‘investor’ – if you can use that word – makes periodic purchases to build up a corpus. During the accumulation period, the investments are managed by the scheme provider to generate a level of returns.  At the time of  retirement, the distribution phase begins. The final corpus is a combination of the purchases and the returns. This corpus – or a part of it – is actually used to buy an annuity. It is this annuity that actually provides a pension!

There are many annuity schemes in India. Typically they are provided by the life insurance companies.  The government provides a scheme called PMVVY that offers a good annuity rate - the limit of corpus is 15 lac per senior citizen.  The scheme would provide pension for 10 years and after that the purchase price would be returned. 

The annuity plans from insurance companies have a large variety of annuity options. Almost all of them provide the pension lifelong, and many return the purchase price to the nominee. Of course the annuity amount depends on the option chosen.  Here is a sample list of options:

Option A: Immediate Annuity for life.
Option B: Immediate Annuity with guaranteed period of 5 years and life thereafter.
Option C: Immediate Annuity with guaranteed period of 10 years and life thereafter.
Option D: Immediate Annuity with guaranteed period of 15 years and life thereafter.
Option E: Immediate Annuity with guaranteed period of 20 years and life thereafter.
Option F: Immediate Annuity for life with return of Purchase Price.
Option G: Immediate Annuity for life increasing at a simple rate of 3% p.a.
Option H: Joint Life Immediate Annuity for life with a provision for 50% of the annuity to the Secondary Annuitant on death of the Primary Annuitant.
Option I: Joint Life Immediate Annuity for life with a provision for 100% of the annuity payable as long as one of the Annuitant survives.
Option J: Joint Life Immediate Annuity for life with a provision for 100% of the annuity payable as long as one of the Annuitant survives and return of Purchase Price on death of last survivor.

As of now, here is the comparison of typical 'returns'

  • Annuity plan, with return of purchase price – About 7%  (taxable)
  • PMVVY - About 8.3% (taxable) (max corpus of 15 lacs per senior citizen)
  • Senior Citizen Savings Scheme – About 8%  (max corpus limit of 15 lacs)

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Jul 9, 2019

Priyank, you have not mentioned your age. So it is not clear whether you are far away from retirement, near retirement or already retired. If you are near retirement and already retired then this answer is for you.

Since you have mentioned "assured" returns, I assume you mean low-risk and stable returns. SR Srinivasan has already touched upon annuity plans and Pradhan Mantri Vaya Vandana Yojana(PMVVY). Here are a few more:

Senior Citizens' Saving Scheme (SCSS)

SCSS is available only to senior citizens (above 60) or early retirees. You need to visit a bank or post office to avail this scheme. Early retirees can invest in SCSS, provided they do so within one month of receiving their retirement funds.

  • SCSS has a tenure of 5 years, which can be further extended by 3 years once the scheme matures.This extension option is currently available just once and the extension request has to be made within 1 year of maturity of the SCSS account.
  • As of today, the interest rate in SCSS is 8.7%, payable quarterly. It is fully taxable. If you are in the 30% tax bracket, post tax returns come to around 6.1%.
  • Maximum investment is Rs 15 lakh. One may open multiple SCSS accounts. The upper limit of Rs 15 lakh is across all accounts.
  • Investment in SCSS is eligible for tax benefits under Section 80C.

Government of India (GoI) Savings Bonds

These bonds are issued by RBI.

  • Tenure of 7 years
  • As of today, interest rate is 7.75%. Interest is set by RBI notification
  • Interest income is taxed as per your tax slab. NOT eligible for tax benefits under 80C.
  • The bonds will be issued in Cumulative or Non-cumulative forms. Interest on the non-cumulative bonds will be payable at half-yearly intervals from the date of issue, while the interest on cumulative bonds will be compounded with half yearly rests and will be payable on maturity along with the principal.
  • No limit on maximum investment.
  • To invest visit any of branch of State Bank of India, select nationalised banks, private sector banks (ICICI Bank, HDFC Bank, Axis Bank, IDBI Bank and so on) or the Stock Holding Corporation of India

If you have exhausted your SCSS limit, then go for GoI bonds next.

Post Office Monthly Income Scheme (POMIS)

POMIS is a government backed scheme.

  • Tenure of 5 years. You can withdraw the invested amount when the scheme matures or reinvest it.
  • As of today, interest rate is 7.7%. It is set each quarter.
  • Interest income is taxed as per your tax slab. NOT eligible for tax benefits under 80C.
  • Maximum investment Rs 4.5 lakh under single ownership. Rs 9 lakh under joint ownership.

Bank fixed deposits (FDs)

A bank fixed deposits (FD) is another popular choice with the retirees. Although the interest rates are lower than SCSS, POMIS or GoI bonds, FDs score highly on ease of availing and flexibility in tenure. Instead of locking funds for a particular duration, an investor may spread the amount across different maturities.

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