Fixed Income: Safe investment avenues for retirees

On the pensioner surviving to the stipulated date of maturity, the purchase price along with the final pension will be refunded to the pensioner.

At a time when banks are reducing interest rates on fixed deposits, senior citizens who depend on bank deposits for monthly cash flow are feeling the pinch. As real interest rates have turned negative since December last year, retirees should diversify their investment corpus across various fixed income instruments for steady cash flow.

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

The PMVVY is a guaranteed pension scheme with death benefits for senior citizens aged 60 years. It is offered by Life Insurance Corporation of India and has a lock-in period of 10 years. On death of the pensioner during the policy term of 10 years, the purchase price will be paid to the beneficiary. On the pensioner surviving to the stipulated date of maturity, the purchase price along with the final pension will be refunded to the pensioner.

The scheme allows for premature exit for the treatment of any critical, terminal illness of the pensioner or spouse. On such premature exit, 98% of the purchase price will be refunded. The pension will be payable during the policy term of 10 years, as per the frequency of monthly, quarterly, half-yearly, yearly chosen by the pensioner at the time of purchase.

The maximum investment amount is Rs 15 lakh. At present, the interest rate is 7.4% per annum on monthly payout. So, if a retiree invests Rs 15 lakh in PMVVY, he will get Rs 9,250 every month for 10 years and the pension amount will remain constant for the period. While there is no tax deducted at source, the monthly payout is taxable as per the individual’s tax rate. After three years into the policy, the pensioner can avail loan of up to 75% of purchase price. For the loan sanctioned till April 30, 2021, the applicable interest rate is 9.5% per annum for the entire term of the loan.

Like all insurance products, PMVVY too has a free-look period of 15 days (30 days if this policy is purchased online) from the date of receipt of the policy document. If the pensioner is not satisfied with the terms and conditions of the policy, he can return the policy to LIC stating the reason for objections. LIC will cancel the policy and return the purchase price paid after deducting the charges for stamp duty and pension paid, if any. The pensioner will have to submit a life certificate in hard copy or on online Jeevan Pramaan of LIC at fixed time intervals and the pension payments will then be released.

Senior Citizen Savings Scheme (SCSS)

The government-sponsored SCSS account can be opened in any authorised bank or post office branch. At present (July to September 2020 quarter), 5-year SCSS offers an interest rate of 7.4%. While the rates are reset every quarter, once invested the rate remains fixed for the entire period. The minimum and maximum amount of investment is Rs 1,000 and Rs 15 lakh respectively. Interest is paid every quarter. So, an investment of Rs 15 lakh will fetch a quarterly payout of Rs 27,750.

An individual of 60 years or more can open the account. An individual above 55 years but below 60 years who has retired on superannuation or under VRS can also open an account subject to the condition that the account is opened within one month of receipt of retirement benefits and the amount should not exceed the amount of retirement benefits. The lock-in period is for five years and can be extended only once for three years.

Investment under this scheme qualifies for the benefit of Section 80C of the Income Tax Act, 1961. Nomination facility is available. Any number of accounts can be opened subject to maximum investment limit by adding balance in all accounts. Joint account can be opened with a spouse only and the first depositor in the joint account is the investor. Premature withdrawal is allowed after one year of opening the account. A penalty of 1.5% of invested amount is charged if closed after one year and 1% if the account is closed after two years.