PM Vaya Vandana Yojana, not a bad deal

To keep up the Prime Minister’s promise on new year’s eve to bring out a fixed interest product for senior citizens, the government’s pension plan for senior citizens is back in a new avatar — the Pradhan Mantri Vaya Vandana Yojana (PMVVY). The scheme’s features remain the same as it was in the earlier version (the Varishtha Bima Yojana which was open for one year from August 2014-August 2015). The only difference is that the interest rate has dropped to 8 per cent now from 9 per cent then. This time, the PMVVY will be open for subscription till May 3, 2018.

The PMVVY is an immediate annuity scheme. Pension flows will begin from the very next month/year after investment, depending on the pay-out option chosen. But the term is only 10 years. At the end of the period, the purchase price, that is, the investment amount, will be returned. In case of death of the individual during the scheme’s tenure, the purchase price will be returned to the nominee.

Given the falling interest rate scenario, a promise of a fixed 8 per cent return for 10 years makes it an attractive option. But one can’t rely solely on this product for a secured retired life as it caps the maximum investment, and, thus, the pension amount.

The scheme can be purchased offline as well as online through Life Insurance Corporation. It is exempt from GST.

Senior citizens above 60 years are eligible to invest in PMVVY. It promises an assured return of 8 per cent if one chooses monthly pension and 8.3 per cent if it is an annual pension. There is quarterly and half-yearly pay-out options too, but in each of it the minimum and maximum investment differs. Say, you choose the monthly pension option; you must invest a minimum of ₹1.50 lakh, which will give you a monthly pension of ₹1,000. But, if you invest up to the allowed maximum of ₹7.50 lakh, you will get a monthly pension of ₹5,000. On the other hand, if you want to receive pension annually, the minimum investment you need to make is ₹144,578, which will fetch you ₹12,000 as pension every year for next 10 years. The maximum investment allowed here is ₹7,22,892, which will let you draw an yearly pension of ₹60,000.

The one thing you need to note here is that the ceiling on the maximum investment under each option is for the family as a whole — the pensioner, his/her spouse and dependants put together.

After completion of three years of the policy, the pensioner is eligible for a loan up to 75 per cent of the purchase price.

The scheme also allows for premature exit. But it is allowed only when you or your spouse suffer from a critical illness (not defined under the scheme now). On early withdrawal, the scheme will return 98 per cent of the investment made originally.

There is one shortcoming in this pension scheme. It caps the maximum investment at ₹7.50 lakh, which gives a monthly pension of Rs ₹5,000 only. This may not be sufficient to cover living expenses, post-retirement. If you have a dependant spouse, you will for sure need a higher income. Also, remember that unlike other immediate annuity plans in the market (from life insurance companies), this scheme doesn’t offer a life-long pension. The guaranteed income is only for 10 years from the date of investment.

Nevertheless, given that the scheme offers a good 8 per cent return on the investment, you should consider it. Currently, the immediate annuity plans in the market offer just about 6-7 per cent return.

Bank fixed deposits for senior citizens offer a rate of about 6.5-7.5 per cent per annum. The Senior Citizens Saving Scheme from India Post is an option. It allows a maximum investment of ₹15 lakh and the interest rate now is 8.3 per cent per annum.

Though the rate is higher than the PMVVY, the tenure is five years and can be extended for a maximum of only three more years. Also, interest payments will be made only once in three months; there is no monthly pay-out option. And, at the end of five years, if the market rate is lower, your interest rate will be lower too.

So, those looking for a secure monthly income can consider PMVVY to cater to a portion of your regular income requirements.

Invest a portion of the lumpsum in your hand in this scheme and the balance in other options such as Senior Citizen Savings Scheme or in an immediate annuity plan. Keep in mind that whichever of these three options you put your money in, the pension/interest is taxable at your slab rate.

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