The Hindu Business Line : Silver lining

As longevity increases — people today live to 80 and 90 years, financial security becomes a major problem. It is more so for those with no government pensions to fall back on and no CGHS (Central government health scheme) facilities for medical help. Social security, which sees people through their old age in the UK and other western countries, does not exist in India. In fact the old-age pension and the widow’s pension, which varies from Rs 150 to Rs 750 a mon th, are grossly inadequate.

As the joint family crumbles, the old values of caring for dada/dadi and nana/nani are disappearing. Many children are moving to the big cities for work and others are migrating to greener pastures abroad. Many just do not have the time or inclination to look after the elderly. Some young people even attempt to grab the property of their parents. So in addition to physical insecurity, financial insecurity looms large on their horizon.

Where families have stayed together and still care for each other, insecurities are less. Milon, 70, is a retired journalist and the eldest of three brothers and two sisters. Two of his siblings have retired — one from a bank and the other from a public sector company. A sister and brother are still in service. All of them, including the sisters who never married, live together in the family house. The way Milon has managed his money has ensured he lives comfortably through his old age.

Sharing, caring

Journalists in the old days had modest pay packets. They did not get pension — only their gratuity and provident fund. But being a journalist, Milon is savvy about money matters. When he retired he got Rs 7 lakh as provident fund and Rs 1.5 lakh as gratuity. The gratuity of Rs 65,000 got earlier from his previous newspaper went in paying off the loan his father had taken for the house built in 1966. The provident fund and gratuity received on retirement went in the marriage of two daughters. The small flat that he had bought in 1994 by paying in instalments Rs 3 lakh was sold for Rs 20 lakh. With this capital and a bank loan he added two more floors to the family house. After paying property tax arrears etc, he had a small sum of money, some of which he invested in the stock market in 1999.

Unfortunately, when the market crashed in 2003 he lost Rs 3 lakh. But he had also been wise enough to invest in mutual funds (40 per cent debt and 60 per cent equity) that were fairly safe. Because Milon’s is a joint family, he pays a very small amount towards the household budget. His medical expenses are Rs 1,000 a month. The annual property tax of Rs 7,000 is also shared by the three brothers. The barsati has been given on rent of Rs 18,000 a month and this is ploughed back into maintenance of the house.

Milon was also wise enough to take medical insurance when he was 55 years old. He pays annually Rs 16,000 towards medical insurance and has a cover of Rs 3 lakh for all three family members. When his wife had to undergo a cataract surgery, he could take her to a good hospital and insurance covered the Rs 34,000 expenses incurred. Milon’s biggest social security has been his joint family. “My father brought up my three daughters. As a journalist I was at work most of the time,” he says. Like Milon, his two brothers and sisters give tremendous value to the joint family. When the youngest two siblings retire in the next five/six years, the family plans to sell its property, make a tidy sum and move to a family home in the districts. “We will share the profits but not give up living together,” he says.

Financial options for seniors

The Senior Citizens Savings Scheme (SCSS), Reserve Bank bonds, the stock market and mutual funds are among the different ways in which seniors can make their money grow. “Senior citizens need secure and low-risk investment options to park their lifelong earnings. They want their hard-earned money to be in safe hands,” says a bank official.

The SCSS offers those above 60 years a nine per cent interest rate (payable every quarter) for a term deposit of five years, extendable by another three years. The minimum investment is Rs 1,000 and the maximum Rs 15 lakh. They have the option of withdrawing their money after a year but have to pay a penalty of 1.5 per cent if the money is withdrawn between the first and second year and 1 per cent if withdrawn after two years. Initially the scheme was available through designated post-offices. Now many public and private sector banks offer it. As further incentive, in December 2007 the government extended tax exemption benefits of section 80 C of the Income Tax Act to investments up to Rs 1 lakh. However, the interest earned is still taxable.

Today seniors can walk into any bank and approach the special senior citizen desk to get their accounts serviced. At some banks they are also eligible for specially designed debit-cum-ATM cards free of cost. The banks offer free monthly statements, collect outstation cheques and sometimes offer a health check-up voucher when the account is being opened. The fixed deposit by a senior citizen earns interest of 9-10 per cent, half a per cent more than other citizens are entitled to. Under the Karur Vysya Bank’s Spouse Senior Citizen’s Scheme, where the account is operated by husband and wife, there is an additional one per cent interest should a partner die during the tenure of the scheme.

Least-risk mutual funds

Apart from safety, seniors want liquidity and better interest rates. Many of them are now investing in mutual funds because they offer liquidity and good returns. They avoid the stock market because of its volatility. More important, they don’t want to risk their lifelong savings. Banks now have designated portfolio managers who invest money for clients in mutual funds with the least risk. Long-term investments in mutual funds of three years or more are safer.

A good fund manager will balance risks to get more stable returns. Systematic Investment Plans (SIPs) are also good options for seniors. You can invest in most mutual funds as little as Rs 500 a month or even less. Dayanita (68), who does small consultancies regularly, puts in Rs 5,000 every month in a (SIP) mutual fund. The money goes straight from her bank account and at the end of three years she hopes to get back Rs 5 lakh. She never lets the money sit in her account. The minute she has Rs 20,000 to Rs 30,000 she can spare in her savings account, she invests it in mutual funds that can be redeemed when she needs the money.

Reverse mortgage

What do you do if you have no cash to live with; have no children to help you through old age, or even if you have children they don’t want to help you financially? Today if you have a flat or bungalow, thanks to the reverse mortgage scheme, you can mortgage it, continue to live in it and get a decent return to live comfortably — meeting the rising cost of living and medical expenses of the elderly. The reverse mortgage loan scheme, launched last year, enables seniors to unlock the value of their home equity.

According to S. Sridhar, CMD of the National Housing Bank, 500 reverse mortgage loans (RMLs) have been sanctioned and Rs 278 crore distributed over Delhi, Haryana, Maharashtra, Andhra Pradesh, Karnataka, Punjab, Tamil Nadu, Rajasthan, Uttarakhand and West Bengal. If the amount seems small, it could be because reverse mortgage is in its infancy and house-owning senior citizens form a distinctive, albeit niche, market.

RMLs are to be extended by Primary Lending Institutions (PLIs) via scheduled banks and housing finance companies registered with the National Housing Bank. The loan can be provided through monthly disbursements or a lump-sum or as a committed line of credit or as a combination of the three. The senior citizen borrower is not required to service the loan during his lifetime. On the borrower’s death or on the borrower leaving the house permanently, the loan is repaid along with accumulated interest, through sale of the house property. The borrower(s)/heir(s) can also repay or prepay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.

The primary lending institution will need to determine the market value of the residential property from time to time, at least once every five years. Based on such revaluation, the primary lending institution may review the quantum of loan.

The amount of RML available to the borrower would depend on the age of the borrower, the market value of the property and prevailing interest rates. RML as proportion of assessed value of the property may range from 40-60 per cent based on the age of the borrower. As the age of the borrower or the market value of the property increases, the borrower becomes eligible to higher amount of loan, and vice versa.

Asked if a person giving his house on mortgage at 65 years would continue getting credit at the appreciated value of his house even if he lives to 95 years, Sridhar said the maximum tenure of the loan, as per the guidelines of the NHB, is 15 years. However, primary lenders have the discretion to consider shorter/longer tenures.

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