Why PM Vaya Vandana Yojana may not be best investment option for senior citizens

This is a challenging time to retire as interest rates are going downwards and search for attractive yields has become tougher. If you are in the evening of your life, you need an investment avenue that provides you regular income along with capital protection. One such option is Pradhan Mantri Vaya Vandana Yojana (PMVVY) pension scheme. The deadline for subscribing to it has just been extended till March 2023. We tell you key features of the scheme and whether you should invest in it:

Interest rate and tenure

PMVVY pension scheme, offered by Life Insurance Corporation, comes with a lock-in period of 10 years. It gives you an assured annual return of 7.66 per cent per annum. The annual return is discounted if you go for higher frequency of payouts like half-yearly, quarterly or monthly. The previous PMVVY scheme offered 8 per cent interest rate, which expired for subscription on March 31, 2020.

Minimum and maximum investment and pension amount

You need to invest a minimum of Rs 1,56,658 to avail Rs 12,000 pension per annum at 7.66 per cent effective interest rate. If you want the pension in monthly mode, the minimum investment amount needed will be Rs 1,62,162 for monthly pension of Rs 1,000. On the other hand, the maximum investment amount, that is, Rs 15 lakh makes you eligible for Rs 9,250 monthly pension at 7.40 per cent rate. If you invest Rs 14,49,086, you can get a pension of Rs 1,11,000 per annum. The following two tables will explain it better:

Maturity and death benefit

If you survive the policy period of 10 years, the purchase price along with final pension instalment will be paid to you. If something happens to you during the policy term, the purchase price will be refunded to the beneficiary.

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Premature withdrawal

The scheme allows premature exit during the policy term under exceptional circumstances. For example, if you require money for the treatment of any critical/terminal illness of self or spouse. The surrender value payable in such cases will be 98 per cent of the investment amount.

Take loan against it

Loan is available under the policy after completion of three policy years. Maximum loan granted will be 75 per cent of the purchase price.

Pension amount is taxable

The pension amount that you receive will be added in your yearly income and will be taxed at your applicable slab rate. Note that the investment amount doesn't fetch tax deductions unlike Senior Citizen Savings Scheme (SCSS) that offers you tax deduction under section 80-C of the Income Tax Act.

Should you invest?

After retirement, capital protection has to be the most important element in your investment approach. That said, PMVVY is a good investment option for stress free regular income. But before you go for it, you must know other alternatives.

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SCSS that comes with five-year lock-in is the closest comparable investment option against PMVVY. It is currently giving an annual interest of 7.4 per cent on quarterly payout option, this turns out to be effectively an annual return of 7.6 per cent. While income received is taxable on both, investment amount in SCSS qualifies for tax deduction under section 80-C of I-T Act. Besides, if you park money in PMVVY at the current interest rate of 7.66 per cent per annum, this is what you will keep receiving for the full tenure of 10 years. Even if rates are revised upwards in the future, the revised rates will be available to only new investors, not existing ones. However, with SCSS you will have time to review your rates after five years when it matures.

"PMVVY and SCSS both are good choices in the current scenario when chances of interest rates going higher are slim, but SCSS can be withdrawn easily and also qualifies for tax deductions, whereas liquidity in PMVVY is limited," says Mrin Agarwal, founder, Finsafe India Private.

Not everyone will like to lock-in their funds for a long period like 10 years and may prefer an alternative even at a lesser rate. For them another safer option for monthly income is Post Office Monthly Income Scheme (POMIS). This has an annual interest rate of 6.6 per cent on monthly payout which is effectively an annual interest rate of 6.8 per cent - lower than that for PMVVY. However, POMIS has a tenure of five years. So, if you do not want to commit funds for 10 years this could be an option. But you can only invest Rs 4.5 lakh for a single account and Rs 9 lakh for a joint account.

If you wish to generate higher return on fixed income part of your portfolio and have the desired risk appetite, some advisors suggest bank FDs over PMVVY, but diversified among public, private and small finance banks. "Some of the smaller private sector and small finance banks are offering higher interest rates than PMVVY for much shorter tenures and with higher liquidity. Hence, senior citizens looking for higher returns can open fixed deposits with these banks and opt for their monthly or quarterly interest payout option for generating regular income. The lower maturity period of these fixed deposits will give more flexibility to the depositors to benefit from a rising interest rate regime, if any, in the future," says Naveen Kukreja, CEO & Co-founder, Paisabazaar.

If you go for bank FDs, the major part of your investment should ideally be with strong banks be it public or private. If you decide to invest in small finance banks, invest only an amount with which you are comfortable taking some risk for high return. Also note that you should not expose more than Rs 5 lakh in one bank including principal and interest income lest a bank default happens, as we saw in the case of PMC Bank, and you lose your money. Although the government has hiked deposit insurance from Rs 1 lakh to Rs 5 lakh, it takes years for depositors to get back their money. Eight months on since RBI put operational restrictions on PMC Bank in September 2019, depositors still have no clue how long the litigation will go on. So, while bank FDs are more liquid and will give you a chance to make the most of upward reversal in the interest rate, PMVVY scores better on the protection front.

As we are living through unusual times amid a pandemic-driven slowdown, you never know, the interest rates may fall further from hereon. Hence, your investment choice should depend on your risk appetite. If you are a risk averse investor looking for a long-term regular income plan, PMVVY should be your first choice. Next comes SCSS and POMIS, followed by bank FDs.

However, if you can take some risk, invest only a portion of your savings in PMVVY and rest can be diversified among SCSS, POMIS or FDs across banks. PMVVY may not be the best investment option for senior citizens, it is at least a good option in the current scenario.

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