As promised by Finance Minister Arun Jaitely in Budget 2014, LIC has re-launched Varishtha Pension Bima Yojana from August 15, 2014. Technically this is an annuity policy with return of premium on death of policy holder.
In this post we review the above product and check if you or your parents should invest into it?
- Minimum age for investment is 60 years
- There is no Maximum age for entry
- It gives return of 9% compounded monthly. So its equivalent of 9.38% annually.
- You can choose to receive pension monthly, quarterly, half yearly or annually
- The pension payment shall be through ECS/NEFT only
- On death of the policy holder, the premium is returned back to the nominee
- The plan is available for only 1 year i.e. from August 15, 2014 to August 14, 2015
Purchase Price and Pension:
The table below gives the minimum/maximum purchase price and the respective pension that one would receive for lifetime. You can buy anything in between (including both amounts).
The maximum limit above is for one family. Family here means spouse and the dependents.
The policy can be surrendered after completion of 15 years. The Surrender Value payable will be refund of Purchase Price.
However, under exceptional circumstances, if the pensioner requires money for the treatment of any critical/terminal 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% of Purchase Price.
Loan facility is available after completion of 3 policy years. The maximum loan that can be granted shall be 75% of the Purchase Price. The rate of interest to be charged for loan amount would be determined from time to time by LIC. Loan interest will be recovered from pension amount payable under the policy.
- This is a simple product with a guaranteed return.
- The scheme is guaranteed by Government of India and is managed by LIC. So it has safety of highest level.
- As the economy develops the interest rates come down. Hence it’s a good product to lock 9% interest rates for a very long time. In case of banks, the maximum tenure for investment is 10 years.
- You can surrender the policy after 15 years and get the entire premium back. So it gives an opportunity to evaluate this investment after completion of 15 years.
- The policy can also be surrendered before completion of 15 years for treatment of illness.
- 75% Loan against policy can be a good thing for emergency liquidity needs.
- The pension you receive is taxable. This would be added to your income and taxed at your marginal tax rate, similar to fixed deposits.
- The pension is not adjusted to inflation. Assuming inflation at 7%, the purchasing power of Rs 5,000 would reduce to Rs 2,500 in 10 Years.
How to Buy?
You can check the details with you LIC agent or LIC office.
You can also invest in Tax Free Bonds issued by various PSUs. There have been no recent issues so you need to buy the same from stock exchange. The maximum duration offered is for 20 years. So you can lock-in the high interest rate for next 20 years.
Below is the calculation:
You can invest Rs 6,39,610 in either buying Tax Free Bond or LIC Varishtha Pension Bima Yojana (annual pension payment).
As of August 11, 2014 IREDA (Indian Renewable Energy Development Agency Ltd) 20 Year Tax Free Bond was trading at Rs 1,120 per bond with coupon rate of 8.80%. So each bond would pay Rs 88 as interest every year for 20 years.
Our calculation is based on IREDA Tax free bonds.
- No. of Tax Free Bonds bought for Rs 6,39,610 = 6,39,610/1,120 = 571
- Interest paid every year = Rs 88 x 571 = Rs 50,248
- If you had invested Rs 6,39,610 in LIC Varishtha Pension Bima Yojana, it would offer Rs 60,000 annually until you live.
These returns are pre-tax. How about people who need to pay taxes?
The returns from tax free bonds are better for people in higher tax bracket of 20% or more.
The above calculation may not hold true today as the price of IREDA bond is Rs 1200, so Varishtha Pension Yojana is better.
Tax Free Bonds or LIC Varishtha Pension Bima Yojana?
The calculation above shows that as per present tax laws the Tax Free Bonds are better bet for higher tax brackets. But remember the investment if for 20 years and also in most cases the income starts to come down after retirement. So when someone retires at 60, he may join some other job which might not be as high paying as his previous job. And as the age increases, the employability reduces due to health conditions. So the income reduces. Also with time the tax slabs keep on increasing and so you pay lower and lower taxes on same income.
In the long run, you might not be in the higher tax bracket and then LIC Varishtha Pension Bima Yojana would start performing better for you.
The good things about Tax Free Bonds are they are liquid instruments, i.e. you can sell it on stock exchange whenever you want.
But if someone outlives 20 years, he may need to plan again and then at that time you might not get such high interest rates.
Both the investments have their good points and drawbacks and there is no clear winner. Both the products are worthy investment for regular income in your retired portfolio. Decide on what mix you want to have depending on your liquidity needs, investment preference, ease of management, etc.
Varishtha Pension Bima Yojana Closure:
This pension plan was open for one year only and you would not be able to buy it after August 14, 2015. My guess is they would relaunch the plan but with lower interest rates. So in case you want to buy it, do it before the above date.
I think LIC Varishtha Pension Bima Yojana is a good and simple product especially for people looking for regular income after retirement. This in itself cannot take care of all retirement needs but has lot of good features to be part of the retired regular income generating portfolio.
Varishtha Pension Bima Yojana Advertisement
This is the advertisement that was splashed for this scheme: