Pradhan Mantri Vaya Vandana Yojana – Should You Buy?

 

 

The Pradhan Mantri Vaya Vandana Yojana (PMVVY) was formally launched on 21 July by Arun Jaitley, the Union Minister for Finance, Defence and Corporate Affairs.

However, the scheme has been available for purchase since 4 May 2017.

Pradhan Mantri Vaya Vandana Yojana, a pension scheme launched by Life Insurance Corporation of India, comes as another option for senior citizens looking for a regular pension income.

Yes, It aims to provide regular pension to senior citizens.

I try to find out whether it is a good option to put in money, especially in this falling interest rate scenario.

Who can buy

PMVVY is a pension scheme exclusively for senior citizens—aged 60 years or more. There is no maximum age for entry.

The scheme is currently open and those interested can invest in it till 3rd May 2018.

Senior citizens can purchase it offline as well as online, through Life Insurance Corporation of India (LIC), which has been given the sole rights to operate it.

The scheme provides an assured return of 8% to 8.30% per annum, depending on whether you choose to get your pensions on a monthly, quarterly, half-yearly or yearly basis. For the monthly option the return is 8% and it is 8.30% for the annual option.

The minimum purchase price for receiving pensions every month is Rs 1.5 lakh, where a senior citizen will get a pension of Rs 1,000/- per month.

The maximum purchase price for monthly pension is Rs 7.5 lakh, which will fetch Rs 5,000/- per month. Importantly, this is the maximum amount that a family can invest under this scheme.

This means, if two or more people from a family decide to opt for this scheme, their total investment cannot be more than Rs 7.5 lakh. The family, for this scheme, comprises the pensioner, his or her spouse and dependants.

 

If a pensioner survives the policy term (10 years), purchase price along with final pension installments shall be payable.

The scheme also allows premature exit/withdrawal for treatment of any critical or terminal illness of self or spouse. On premature exit, 98% of the purchase price shall be refunded.

Death Benefit

On death of the policyholder during the policy term of 10 years, the Purchase Price shall be refunded to beneficiary.

Maturity Benefit

On survival of the policyholder to the end of the policy term of 10 years, Purchase price along with final pension installment shall be returned.

Surrender Value

The policy allows premature exit during the policy term under exceptional circumstances like the Pensioner requiring money for the treatment of any critical/terminal illness of self or spouse. The Surrender Value payable in such cases shall be 98% of Purchase Price.

Loan

Loan facility is available after completion of 3 policy years. The maximum loan that can be granted shall be 75% of the Purchase Price.

Should you buy?

Given that the maximum pension that a family can earn per month under the scheme is Rs 5,000/- or Rs 60,000/- a year—it may not be attractive to many investors.

Interest rates in India are headed for a historic low and implications on individual will be extensive.

Just check historical Interest Rates in India.

Fixed Deposit Rates for 1-3 years,

In Year  1991-92, Fixed Deposit rates was 12% p.a.

In Year  2001-02, Fixed Deposit rates was 7.5% -8.50% p.a.

In Year 2010-11, Fixed Deposit rates was 6.75% -7.25% p.a.

Now State Bank of India, India’s largest lender, pays 6.75% for 1 year fixed deposit and 6.50% for 3 year fixed deposit (w.e.f 1st July 2017).

With rates for deposits falling to below 7 per cent, retail investors are feeling the pinch.

In my opinion, if inflation continues to remain firm and fixed deposit rates retained at current levels then this scheme will only make sense for investors whose income is either non-taxable or if it falls in the lowest tax bracket of 10 per cent and you are getting fixed interest rate 8% to 8.30% per annum.

For high tax slab investors or having large chunk of retirement corpus, the post-tax returns on such deposits have gone further down because Annuity or Pension Income from pension plans is treated as income and taxed.

The scheme is at par with other schemes for senior citizens such as Senior Citizens Savings Scheme (SCSS), which offers a similar return of 8.3% per annum currently. Given that both scheme have a cap—Rs 15 lakh for SCSS and Rs 7.5 lakh for PMVVY—those who have a small retirement corpus can divide their investments between these schemes.

In the current falling interest rate scenario and expected to go down further, the guaranteed 8.3% annual return for 10 years is a good return.

[blockquote style=”1″]”The question isn’t at what age I want to retire, it’s at what income.” ~George Foreman[/blockquote]

 

I am a CERTIFIED FINANCIAL PLANNERCM. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.

If you have a question about your own financial situation please connect with me.  I’d be delighted to try to be of service.

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