<div><em>In spite of its minuses, the scheme warrants a portion of your retirement funds to take care of ‘interest rate risk’ and the longevity risk, writes <strong>Sunil Dhawan</strong></em></div><div> </div><div>Varishtha Pension Bima Yojana (VPBY), a pension plan exclusively for senior citizens and solely operated by Life Insurance Corporation of India (LIC) is closing on August 14, 2015. In its earlier version under the NDA government’s last term, the scheme was enrolled by a total of 3.16 lakh individuals. There are reports that the South Zone division of LIC had already sold 4.18 lakh policies till July 15 in the current financial year. </div><div> </div><div>Targeted at senior citizens, the scheme has its own pluses and minuses. Let’s visit them. </div><div> </div><div><strong>What and How</strong>. Anyone who is 60 years or above can invest in the plan. The minimum and maximum purchase price (lump sum investible) and corresponding pension amount is fixed under VPBY, depending on frequency of pension option one opts for.</div><div> </div><div>Pension can be monthly, quarterly, half-yearly or yearly and maximum cap is Rs 5,000, Rs 15,000, Rs 30,000 and Rs 60,000, respectively on purchase price of Rs 6,39,610, Rs 6,54,275, Rs 6,61,690 and Rs 6,66,665, respectively. </div><div> </div><div>Importantly, the maximum pension for a family (including self, spouse and dependents) as a whole too is capped and should not exceed the maximum pension limit. For senior citizens who are HNI, this scheme certainly may not be attractive since the maximum pension amount is capped at Rs5, 000.</div><div> </div><div><strong>Returns</strong>. The returns are around 9 per cent per annum (p.a). Illustratively, for investment of Rs 1,000, pension rates (not age specific) would be Rs 93.8069 p.a. for yearly, Rs 91.7045 p.a for half-yearly, Rs 90.6767 p.a. for quarterly and Rs 90.0000 p.a. for monthly options. Thus, under monthly option, the return is 9 per cent while under yearly, annual return on investment is 9.38 per cent.<br><br><img alt="" src="http://bw-image.s3.amazonaws.com/pension-graph-lrg.jpg" style="width: 650px; height: 210px; margin: 1px;"></div><div><br> </div><div><strong>Exit route. </strong>The scheme has no maturity date as it offers lifetime pension. But, there is an exit route. One can surrender it only after completion of 15 years. The surrender value would be the invested amount i.e. the purchase price. However, under exceptional circumstances, if the pensioner requires money for treatment of any critical illness of self or spouse then the policy can be surrendered before the completion of 15 years and the surrender value payable shall be 98 per cent of purchase price i.e. a 2 per cent penalty is there on early exit.</div><div> </div><div><strong>Pluses and minuses:</strong> The interest rate in VPBY, unlike a fixed deposit in bank which stops at the end of the tenure, keeps coming till lifetime. Now, when the interest rate is high in a falling interest rate scenario, compared to other competitive products, it makes sense to invest in such a product. </div><div>On the flip side, the interest from VPBY is fully taxable but so is the bank fixed deposit interest. </div><div> </div><div>There is no TDS on interest unlike interest from bank. Also, as per budget 2015 announcements by the finance minister, there will not be any service tax for investments made after 1st April this year. Although, it’s not a retrospective move and hence earlier investors stands at a disadvantage.<br> </div><div>Those in the lower tax brackets may still consider VPBY as on the ground of taxability as it’s similar. Where it doesn’t help senior citizens, is the cap on the investment amount and the pension amount which is capped at Rs 5,000 a month.</div><div> </div><div><strong>What to do:</strong> Even though the returns are high, do not park substantial proportion of your funds in VPBY as it has 15-year lock-in period. Exiting during emergency could be tough too. VPBY could provide cushion from ‘interest rate risk’, especially when seniors rely on interest income with life expectancy increasing. The interest rates since the last one year when the scheme was launched, is already down by 1-1.5 percent Also, many banks have reduced the ‘extra’ or the additional rate from 0.5 to 0.25 percent for senior citizens.</div><div> </div><div>Bank deposits currently offer around 8 per cent even for seniors. Locking in funds with bank for even ten years at 8 per cent is lower than what VPBY offers. If one feels that interest rates are likely to come down over the years, then locking in funds with VPBY for a fixed, assured return till lifetime and with sovereign guarantee on principal is a good way to shore up overall returns on one’s portfolio.</div><div> </div>
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