<b> Your Money:</b> Senior citizens pension scheme offers good rate

Returns will be taxed and money is locked in for 10 years, so, invest only part of your portfolio

With interest rates on a downward spiral, senior citizens should be happy with the Union Budget’s proposal to start a scheme for them which offers an annual return of 8 per cent for 10 years. The scheme will be launched by the Life Insurance Corporation of India (LIC) on April 1 and will offer interest payouts on a monthly, quarterly, half-yearly and annual basis.
 
Earlier in December, the Prime Minister had announced a special senior citizens fixed deposit which also offers a guaranteed return of 8 per cent and had a tenure of 10 years. There was also a maximum investment limit of Rs 7.5 lakh in this FD. How do these schemes compare with other investment options available for senior citizens?
 
A similar pension scheme for senior citizens was offered earlier by LIC in 2014-15 also, which was open for subscription for a year. It had offered an annualised return of around 9 per cent. The new scheme too is expected to be open for subscription for a year from the date of its launch.
 

According to Suresh Sadagopan, founder Ladder7 Financial Advisories, while 8 per cent interest looks attractive at this point of time, for those senior citizens who fall in the higher tax bracket, the effective yield will be lower than 8 per cent.
 
“Annuity is completely taxed in the hands of the investor. Keep that in mind and invest only a part of your portfolio in such schemes,’’ he says.
 
Another thing to keep in mind is that typically rate of interest on such annuity schemes is higher for those who are older. So, someone who is 70 years will get a higher rate than someone who is 60. Despite that, given the current annuity rates of existing pension schemes, eight per cent looks attractive.
 
For instance, in case of LIC’s own annuity plan, Jeevan Akshay VI, the rate of interest for someone who is 60 years of age is roughly seven per cent. LIC had reduced the rates on this plan in December 2016, after the fall in interest rates.
 
According to P Venugopal, former CEO IndiaFirst Life Insurance and Founder, Insuranceinbox.com, “On a pure comparison of returns earned in the short term, this annuity plan gives lesser yield than a normal bank FD for senior citizens. However, the bank FD rates keep changing (mostly going down, in the falling interest rate scenario) while the annuity rates are fixed. So, in the long run, the annuity rates may be better considering there is certainty or the rate of interest earned. But if you are looking at short term or if you are comfortable with a little volatility, bank FDs or even fixed income mutual funds are better option than annuity plans. You may even consider National Pension Scheme which gives better yields with flexibility to withdraw your money any time.”
 
Senior citizens can also consider NCDs which could give potentially higher returns. But keep in mind the safety aspect as NCDs are issued by private players, unlike the pension scheme which will be issued by LIC and hence is very safe, points out Sadagopan.
 
National Savings Certificate, which gives 8 per cent for five years and post office senior citizens scheme which offers 8.5 per cent for five years are other options that offer liquidity. But the interest rate is subject to change.