Due Diligence. Atal Pension Yojana: Guaranteed, but low pension

The Atal Pension Yojana (APY), like the National Pension System (NPS), seeks to provide monthly pension to subscribers from the age of 60.

While the APY is open to all citizens of India between 18-40 years, it is focussed on workers in the unorganised sector.

Guaranteed pension The scheme has been tailored to make it attractive to the target group. The monthly contribution, for instance, is modest — from a low of ₹42 a month for an 18-year-old desiring a pension of ₹1,000, to a maximum of ₹1,454 a month for a 40-year-old seeking ₹5,000 as monthly pension.

Also, importantly, unlike the NPS in which the pension is market-linked, the APY offers guaranteed minimum pensions.

Depending on the amount and period of contributions, the fixed minimum pension for APY subscribers varies from ₹1,000-5,000 a month.

Pros and cons A guaranteed pension amount removes uncertainties for subscribers. But it also makes for a modest return.

Here’s an example based on numbers put out by PFRDA. Say, an individual joins the APY at the age of 18 and makes a contribution of ₹210 a month for 42 years. This will entitle him to a monthly pension of ₹5,000 after the age of 60.

On the subscriber’s death, his spouse will also get the pension. Later, the nominee of the subscriber will be returned a corpus of ₹8.5 lakh.

Assuming that pension is drawn for a total of 30 years by the subscriber and his spouse, the annualised return works out to about 8 per cent. The pension amount is taxable; so, the effective returns will reduce further if the subscriber, post-retirement, falls within the tax net.

Next, subscribers have to factor in that the guaranteed pension amount is quite small when we take into account inflation.

A subscriber to the APY, who is 18 today, will start getting pension after 42 years. If annual inflation is 5 per cent, ₹5,000 and ₹1,000 today will be worth only ₹644 and ₹129 after 42 years. If the subscriber is 40, the ₹5,000 and ₹1,000 monthly pension after 20 years. will be worth only around ₹1,884 and ₹377 then.

So, depending on just the APY alone in the retirement years is clearly not a good idea.

The documents put out by the PFRDA talk about ‘fixed minimum pension’ guaranteed by the government. That could mean that the actual pension amounts could be higher than what is guaranteed.

But APY subscribers should not count on this. Schemes which guarantee returns usually invest in low-risk, low-return instruments. Under the NPS, subscribers have the flexibility to decide both on the pension manager and the allocation between equity and debt instruments. But under APY, the money collected will be managed by appointed managers as per the investment pattern specified by the Government — the subscriber does not get to choose either the investment pattern or the pension fund.

Room for betterment Surprisingly, for a product targeted at the unorganised sector which employs a large number of low-income workers, the APY has some rather stiff conditions on discontinuation of contribution by the subscribers — after six months, the account will be frozen; after 12 months, it will be deactivated; and after 24 months, it will be closed.

Finally, while contributions to the NPS enjoy generous tax breaks (up to ₹2 lakh a year), no such luck yet for APY contributions.

The APY is well-intentioned — to provide a much-needed safety net in the retirement years for workers in the unorganised category. The government is also chipping in by co-contributing 50 per cent of the contribution or ₹ 1,000 a year, whichever is lower, to the subscriber’s account, for five years if the APY account is opened before December 2015.

This benefit though will be available only to subscribers who are not members of any statutory social security scheme such as Employees Provident Fund, and who are not income-tax payers.

But an improvement in the APY product design and more flexibility in investment choices for better returns may be the way forward.

For investors who can take a bit of risk and seek a higher pension, the NPS presents a better alternative — investment flexibility which offers the possibility of healthy returns and pensions, and also tax breaks on investments as a sweetener.

Those having an NPS account already need not bother with opening an APY account.

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